Investors should greet Ambuja’s September quarter results with enthusiasm as Ambuja has beaten our profit estimates and stays on course to meet our full year profit estimates.
While aggregate cement volumes grew by 0.3%, 6% lower versus our estimates; blended realizations increased by 9% over prior year and resulted in a 9% increase in net sales for the company. Ambuja surprised us positively with the adjusted EBITDA margins of 15.7% versus 12.3% in the prior year and our estimate of 14%. The beat was largely driven by gains from reduction in inventories.
However, the effect of increase in the prices for petcoke, railway freight and diesel was visible in 12% increase in the cost of raw material, power, fuel and freight. On brand level, standalone Ambuja’s adjusted EBITDA margin of 18% versus our estimate of 16.1% reflected strong operational efficiency offsetting weaker profitability from ACC. We do not see any material change to our long term forecasts.
Our fair value remains unchanged at Rs 262 per share. Post our initiation of coverage, Ambuja’s share performance has outperformed Ultratech by 13% in-line with our thesis and remains undervalued. Equity markets are under discounting synergy benefits of Ambuja, ACC and Lafarge. (Read Ambuja expected to show improved relative pricing power).
We believe Ambuja’s narrow economic moat is underpinned by its strong pricing power in key markets. The industry-level entry barriers that benefit Ambuja stem from the proximity to raw-material sources that manufacturing plants require, capital intensity, and cement’s ponderous value-to-weight ratio. High fair value uncertainty reflects exposure to construction and housing which are cyclical and linked to economic activity.
Our 5-year forecast includes 10% capacity addition per annum and we believe the company will pursue both organic and inorganic expansions to achieve this growth. Long term demand for building materials remains attractive as government pursues its high spending on infrastructure and housing.
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