26 February 2013
Update | Sector: Cement
Ambuja Cements
BSE SENSEX
S&P CNX
19,332
5,855
CMP: INR200
TP: INR202
Downgrading to Neutral
Premium profitability to dilute, valuations rich; Downgrading
to Neutral
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1,6,12 Rel. Perf. (%)
ACEM IN
1,542.2
221/136
4/-3/17
Potential capacity constraints and royalty uncertainty risk to CY15 EPS
M.Cap. (INR b)/(USD b) 308.1/5.7
Valuation summary (INR b)
Y/E Dec
Sales
EBITDA
NP
Adj. EPS (INR)
EPS Gr. (%)
BV/Sh. (INR)
RoE (%)
RoCE (%)
Payout (%)
Valuations
P/E (x)
P/BV (x)
EV/EBITDA (x)
EV/Ton (USD)
2012 2013E 2014E
96.7 108.9 124.0
24.7 26.4 30.5
15.4 17.4 20.6
10.0 11.3 13.4
23.1 37.9 33.7
56.9 63.5 71.6
18.3 18.7 19.8
27.6 27.7 29.2
49.8 41.3 39.2
20.0
3.5
10.7
178
17.7
3.1
9.7
172
14.9
2.8
7.9
157
Lack of timely capacity addition could constrain Ambuja Cements' (ACEM) growth in
CY14-15, if demand growth is higher than estimated 8% CAGR for ACEM.
Increase in royalty will hurt CY13E/14E EPS by 3-4%; further upward revision post
CY14E not ruled out.
ACEM's superior profitability is diluting as peers catch up and ACEM specific cost-push
translate into slower EPS growth.
At an EV of 7.9x CY14E EBITDA and USD162/ton, current valuations factor ACEM's cost
leadership and superior profitability. Downgrade to Neutral on likely operational under-
performance. Our preferred pick is UltraTech/Grasim and Shree Cement.
Lack of meaningful capacity addition could restrict ACEM's growth
ACEM's existing clinker capacity of ~16.5mt is only sufficient for annual cement
production of ~24mt, which is 9% growth over CY12. Its new capacity of 4.5m tons
is expected only in CY15 (orders yet to be placed, awaiting approval from the
board). While it would de-bottleneck capacities to meet growth, any higher than
estimated 8% CAGR in CY12-14, would restrict ACEM's growth in CY14-15.
Royalty increase to hurt CY13E/14E EPS, risk of further increase from
CY15E
Though introduction of royalty fees of 1% (v/s proposal of 2%) to Holcim (in lieu
of fixed fees paid) will impact ACEM's CY13E/14E EPS moderately by 3-4%, it
introduces uncertainty to ACEM's cost structure as rate of royalty will be revised
post CY14. Recent increase in royalty for PT Holcim Indonesia (from existing 1.5%
to 5% from CY13) raises the discomfort over future royalty for ACEM.
Shareholding pattern %
As on
Dec-12 Sep-12 Dec-11
Promoter
50.6
50.7
50.3
Dom. Inst
9.5
10.6
13.6
Foreign
32.4
31.3
28.4
Others
7.5
7.4
7.7
Profitability edge to dilute, reflecting slow EPS growth
We expect a steady dilution in ACEM's premium in profitability over peers hereon
due to (1) limited scope for an uptick in operating leverage and (2) impact of
increased royalty to Holcim. Further, potential risk to profitability exists in the
form of a) gradual reduction in subsidies over next 4-5 years, b) further increase
in royalty from CY15 and c) capacity constraint in CY14/15. ACEM would have
lower EPS CAGR of 15.6% (CY12-14E), against 17-20% for its large peers.
Stock performance (1 year)
Valuations factor premium profitability; Downgrading to Neutral
ACEM is trading at 14%/12% premium to ACC/UltraTech (on CY14 earning
valuation). We believe that at an EV of 7.9x CY14E EBITDA and USD157/ton,
valuations factor ACEM's superior profitability. We downgrade the stock from a
Buy to
Neutral
and value it at 7.9x CY14E EV/EBITDA (v/s 9x earlier) to factor the
risk of further increase in royalty, potentially slower-than-industry growth in
CY15 and gradual reduction in subsidies. Our target price is INR202.
1
Investors are advised to refer
through disclosures made at the end
of the Research Report.
Jinesh Gandhi
(Jinesh@MotilalOswal.com); + 91 22 3982 5416
Sandipan Pal
(Sandipan.Pal@MotilalOswal.com); +9122 3982 5436

Ambuja Cements
Gradual demand recovery, slowing capacity addition augurs well for the
cement cycle
Gradual demand to recovery in FY14E-15E:
We expect a gradual recovery in cement
volumes, driven by pre-election spend on development work and expected revival
in infrastructure investments. Demand could clock a CAGR of 9% over FY13E-15E,
against 6% over FY10-12.
Pricing outlook to strengthen:
Cement prices have been resilient even during the
seasonally weak period. This, we believe, reflects high cost (both opex and capex),
implying little risk of any major price correction in the medium-to-long term.
Rather, an expected revival in demand over 2HFY13-14 renders a strong outlook
for price strengthening, hereon.
Moderation in cost-push hereon:
Sustained cost escalation of the last couple of
years has begun showing signs of moderation. Most of the cost increases - freight
(rail freight hike, rise in diesel price) and energy (coal price hike) - are behind.
Prices of imported coal and pet coke are moderating.
Supply concerns easing off:
Major capacity addition is behind and new additions
(~64m tons over FY13E-16E in the worst case v/s ~105m tons during FY09-12) will
be in line with incremental demand, gradually easing the oversupply. While there
is limited scope of brownfield capacity addition in existing plants, there are major
deterrents in setting up Greenfield capacity: (a) significant escalation in capital
cost (currently at USD140-150/ton), and (b) increase in gestation period (due to
challenges like land acquisition, approvals etc). Greenfield capacity would require
EBITDA of INR1,200-1,300/ton to earn reasonsable return on capital.
Utilization to see gradual uptick:
With demand growth (9% CAGR) likely to outpace
supply growth (CAGR of 7% over FY13E-15E), we expect capacity utilization to
improve gradually from 74% in FY12 to 78% by FY15E. Rising utilization would aid
return of sustainable pricing power.
EBITDA/ton to post 10% CAGR:
We expect the Indian cement industry to witness
consistent improvement in operating performance over FY13E-15E on the back of
uptick in profitability and dilution of supply pressure. Realizations would increase
by INR15/bag in FY14E and INR12/bag in FY15E, which would drive EBITDA/ton (for
our cement universe) to INR1,141/1,245 in FY14E/15E (10% CAGR).
Expect gradual improvement in profitability, given
no major downside risk to pricing
Annual capacity addition to lag incremental demand
Source: Company, MOSL
26 February 2013
2

Ambuja Cements
ACEM among the best cement companies in India, with top quartile
operating performance
ACEM is among the best cement companies in India, with strong brand equity,
focused segment mix (retail/trade), focused market mix (West, North and East),
and diversified fuel and transport mix, translating into high profitability, capital
efficiency and payout.
Company has the ability to fund future growth without impacting balance sheet
and dividend payout.
It continues to focus on North, West and East India. Its incremental volumes would
be derived from the North and East. It is planning capacity addition of ~3m tons in
Rajasthan. ACEM's geographical location (of Gujarat plant) gives flexibility to
choose between domestic and export market.
Company is focused on the retail/trade segment, which contributes ~80% to its
volumes (v/s ~60% for the industry). It has a large distribution network of over
7,800 dealers and 25,000 retailers across 24 states, giving it strong positioning in
semi-urban and rural markets. It enjoys very strong brand equity and market
leadership in its key markets.
Lack of timely capacity addition could restrict growth in CY14-15
Post its expansion cycle over CY09-11, ACEM has installed clinker/cement capacity
of 16.4m/27.5m tons. While it can further debottleneck clinker capacity to match
its grinding capacity requirement, in case of higher than estimated growth of 8%
CAGR (CY12-14E), ACEM would be constrained for capacity like in CY08-10.
Company's existing clinker capacity of ~16.5mt is only sufficient for annual cement
production of ~24mt, which is 9% growth over CY12.
Its capacity expansion of 4.5m tons at Rajasthan would commence operations
only in CY15.
We expect ACEM's dispatches to grow 8% annually in CY13E/14E (implied utilization
of 86%/93%). The Manufacturing Process Review (MPR) conducted by Holcim
should lead to some de-bottlenecking of clinker capacity (e.g. clinker capacity at
Rabriyawas plant would increase to 2m tons from the current 1.86m tons) and
drive near term volume growth.
Limited clinker capacity may curb volume growth…
…or impact profitability, like in CY08-10
Source: Company, MOSL
26 February 2013
3

Ambuja Cements
ACEM's share in industry capacity to decline
Source: Company, MOSL
ACEM's share in industry capacity has been diminishing due to slower pace of
capacity addition. We expect its capacity share to reduce further over CY13E-14E,
given that ACEM has no major capacity additions during this period.
Any sharp recovery in demand over CY12-14, would test ACEM's ability to grow in
line with the market without compromising profitability (like in CY08-10, when it
had to buy clinker to maintain volume growth).
Profitability premium to peers to dilute
Historically, ACEM has enjoyed superior profitability, driven by (1) focused market
mix (North, East and West, with minimal exposure to the South), (2) segment mix
(almost 80% in the non-volatile trade segment), and (3) cost advantage in the
form of higher blending (~1.4x), diversified fuel mix and freight mix.
However, we expect a steady dilution in its premium on profitability over peers
hereon due to (1) limited scope to uptick in operating leverage, and (2) impact of
increased royalty to Holcim.
Further, potential risk to profitability exists in the form of a) gradual reduction in
subsidies over next 4-5 years, b) further increase in royalty from CY15 and c)
capacity constrained led lower volume/higher cost in CY14/15.
Subsidies from the government contributed ~INR4.3b or ~INR200/ton to EBITDA
in CY11, which we believe should gradually reduce over the next 4-5 years.
Cost savings triggers that ACEM could witness are restricted to various initiatives
like usage of alternate fuel to reduce consumption rate, manufacturing synthetic
gypsum, acquisition of fly ash manufacturer etc.
26 February 2013
4

Ambuja Cements
EBITDA/ton trend v/s large cap peers (INR)
Profitability premium to MOSL average to dilute (INR/ton)
Source: Company, MOSL
Royalty increase to hurt CY13E/14E EPS, threat of further revision from
CY15E
Increase in royalty fees of 1% (v/s proposal of 2%) to Holcim (in lieu of fixed fees
paid) will impact ACEM's CY13E/14E EPS moderately by 3-4% (for effective increase
in royalty of 0.6-0.7%). However, it introduces a mere uncertainty to ACEM's cost
structure as the board is authorized to review and revise future royalty (from
CY15 as 1% royalty is fixed for CY13-14).
Recent increase in royalty for PT Holcim Indonesia (from existing 1.5% to 5% from
CY13) increases the discomfort over future royalty for ACEM.
Initial royalty proposed was ~2%, which was later reduced to 1% on intervention
of the independent directors. Interestingly, two of these seven independent
directors, viz Mr M.L.Bhakta and Mr Naresh Chandra are stepping down at the
forthcoming AGM. While Mr M.L.Bhakta has been on the board since September
1985, Mr Naresh Chandra has been on the board since July 2008.
Considering these developments, further increase in royalty, post CY14, is a risk
and could further dilute ACEM's profitability.
Lowest earnings growth and low sensitivity of earnings to cement prices
ACEM has the lowest EPS CAGR of 15.6% (CY12-14E) among its comparable peers,
which are expected to post 17-20% CAGR.
ACEM has one of the lowest price and cost sensitivity among large cap peers as
seen from the below illustration that delta in EPS caused by 1% change in price,
cost and volume.
ACEM's lower sensitivity reduces earnings volatility in a down-cycle, but also
restricts upside in an up-cycle. Top quartile operating efficiencies mean lower
scope of improvement in an up-cycle/improving market environment.
While it has relatively higher sensitivity to volume increase, constraint in clinker
capacity could curb the advantage if demand posts positive surprise (as discussed
in the earlier section).
In the backdrop of (a) steady pricing resilience and (b) moderating cost escalations,
ACEM is likely to witness the least upside among large caps on account of positive
surprises on volume/price/cost.
5
26 February 2013

Ambuja Cements
ACEM to witness slowest EPS CAGR (CY12-14E)
Source: Company, MOSL
Has been a defensive play due to limited scope of operational improvement
ACEM derives ~80% of volumes from trade segment, where prices
are less volatile and it enjoys premium pricing
ACEM's lower EPS sensitivity (%) to price/cost offers moderate upside
in an up-cycle, while its higher volume sensitivity may face capacity
constraint
Source: Company, MOSL
ACEM: CY14E performance sensitivity to cement prices
Cement Price
chg over CY14
(INR/Ton)
-100
0
100
250
300
400
500
600
EBITDA/Ton
(INR/Ton)
839
939
1,039
1,189
1,239
1,339
1,439
1,539
EPS
INR
9.4
10.5
11.7
13.4
14.0
15.1
16.2
17.4
P/E
(x)
22.4
20.0
18.0
15.7
15.0
13.9
12.9
12.1
EV/
EBITDA
(x)
12.1
10.8
9.7
8.4
8.0
7.4
6.8
6.3
EV/Ton
(USD)
177
176
175
173
173
171
170
169
TP at
9x EV/EBITDA
(INR)
152
167
181
202
210
224
238
253
Source:
Net
EV/Ton
Debt
at TP
(INR m) (USD)
-46,583
123
-48,205
137
-49,827
150
-52,259
170
-53,070
177
-54,692
190
-56,314
204
-57,936
217
Company, MOSL
26 February 2013
6

Ambuja Cements
Valuations factor premium profitability; Downgrading to Neutral
Re-rated, in line with expectations:
Due to its cost leadership and favorable
business mix, ACEM has been our preferred large cap cement stock (we upgraded
ACEM to Buy; refer to report dated 16 May 2012). The stock has outperformed
peers and has been re-rated in line with our expectations. It is now trading at
14%/12% premium to ACC/UltraTech (on EV/EBITDA basis), and at par to
replacement cost.
Business outlook unaltered, but no further re-rating expected:
Operationally, we
expect ACEM's strong earnings growth to continue. Its superior profitability and
earnings growth also justifies valuation premium. However, we expect no further
re-rating going forward, given that current valuations (both in terms of EV/ton
and EV/EBITDA) are nearing the upper range. ACEM is trading at premium
valuations - EV of 9.7x CY13E EBITDA and 7.9x CY14E EBITDA. Also, asset valuations
at USD172/ton for CY13E and USD157/ton for CY14E are at a premium to replacement
cost.
Downgrading to Neutral on rich valuations; lower target price to INR202:
The low
sensitivity of ACEM's earnings to cement prices/input costs and its superior
operating efficiency result in limited scope for positive surprise. We believe current
valuations are pricing the cost leadership and superior profitability. We downgrade
the stock from a Buy to
Neutral
and value it at 8x CY14E EV/EBITDA (v/s 9x earlier)
to factor the risk of further increase in royalty, potentially slower-than-industry
growth in CY14-15 and gradual reduction in subsidies. Our target price is INR202.
Both earnings-based (EV/EBITDA) and asset-based (EV/ton) valuations are nearing the upper end
Trading at significant premium to replacement cost
Comparative EV/ton (Indexed to ACEM)
Source: Company, MOSL
26 February 2013
7

Ambuja Cements
Lower upside potential compared to peers
Source: Company, MOSL
26 February 2013
8

Ambuja Cements
Financials and Valuation
Income Statement
Y/E December
Net Sales
Change (%)
Total Expenditure
% of Sales
EBITDA
Change (%)
Margin (%)
Depreciation
EBIT
Int. and Finance Charges
Other Income - Rec.
PBT before EO Exp.
EO Expense/(Income)
PBT after EO Exp.
Current Tax
Deferred Tax
Tax Rate (%)
Reported PAT
PAT Adj for EO Items
Change (%)
2010
73,902
4.4
55,666
75.3
18,236
-2.3
24.7
3,872
14,364
487
2,476
16,353
-265
16,619
3,532
450
24.0
12,636
12,434
4.7
2011
85,043
15.1
65,656
77.2
19,387
6.3
22.8
4,452
14,935
526
2,978
17,387
358
17,029
3,613
1,127
27.8
12,289
12,547
0.9
2012E
96,749
13.8
72,074
74.5
24,675
27.3
25.5
5,373
19,302
757
4,042
22,588
3,570
19,018
6,048
0
31.8
12,971
15,435
23.0
2013E
108,894
12.6
82,467
75.7
26,428
7.1
24.3
5,144
21,284
672
4,600
25,212
0
25,212
7,059
756
31.0
17,397
17,397
12.7
(INR Million)
2014E
124,018
13.9
93,522
75.4
30,496
15.4
24.6
5,322
25,174
625
5,350
29,899
0
29,899
8,372
897
31.0
20,630
20,630
18.6
Balance Sheet
Y/E December
Equity Share Capital
Total Reserves
Net Worth
Deferred Liabilities
Total Loans
Capital Employed
Gross Block
Less: Accum. Deprn.
Net Fixed Assets
Capital WIP
Investments
Curr. Assets
Inventory
Account Receivables
Cash and Bank Balance
Others
Curr. Liability & Prov.
Account Payables
Provisions
Net Current Assets
Misc Expenditure
Appl. of Funds
E: MOSL Estimates
26 February 2013
2010
3,060
70,241
73,301
5,309
650
79,260
87,788
31,511
56,278
9,307
6,260
31,353
9,019
1,282
17,482
3,571
23,942
12,976
10,966
7,412
5
79,260
2011
3,069
77,626
80,694
6,436
466
87,597
96,118
35,158
60,960
5,773
8,643
40,043
9,250
2,409
20,691
7,694
27,822
15,909
11,913
12,221
2012E
3,084
84,966
88,051
5,483
395
93,929
99,356
40,531
58,825
5,000
16,558
43,864
9,839
2,134
22,537
9,353
30,318
15,904
14,414
13,545
2013E
3,084
95,065
98,149
6,239
500
104,888
102,356
45,675
56,681
10,000
19,478
49,226
11,934
2,983
23,867
10,442
30,498
14,686
15,812
18,728
0
104,888
(INR Million)
2014E
3,084
107,617
110,701
7,136
500
118,337
106,356
50,997
55,359
16,000
25,578
56,063
13,591
3,398
27,182
11,892
34,663
16,655
18,008
21,400
0
118,337
87,597
93,929
9

Ambuja Cements
Financials and Valuation
Ratios
Y/E December
Basic (INR)
EPS
Cash EPS
BV/Share
DPS
Payout (%)
Valuation (x)
P/E
Cash P/E
P/BV
EV/Sales
EV/EBITDA
EV/Ton (Cap) - US$
Dividend Yield (%)
Return Ratios (%)
RoE
RoCE
Working Capital Ratios
Asset Turnover (x)
Debtor (Days)
Working Capital Turnover (Days)
Leverage Ratio (x)
Current Ratio
Debt/Equity
2010
8.1
10.7
47.8
2.6
36.7
2011
8.2
11.1
52.4
3.2
46.7
2012E
10.0
13.5
56.9
3.5
49.8
2013E
11.3
14.6
63.5
4.0
41.3
2014E
13.4
16.8
71.6
5.0
39.2
24.4
18.0
3.8
3.2
14.0
183
1.6
20.0
14.8
3.5
2.7
10.7
178
1.8
17.7
13.7
3.1
2.3
9.7
172
2.0
14.9
11.9
2.8
1.9
7.9
157
2.5
18.1
24.1
16.3
23.2
18.3
27.6
18.7
27.7
19.8
29.2
0.9
6
37
1.0
10
52
1.0
8
51
1.0
10
63
1.0
10
63
1.3
0.0
1.4
0.0
1.4
0.0
1.6
0.0
1.6
0.0
Cash Flow Statement
Y/E December
Op. Profit/(Loss) before Tax
Interest/Dividends Recd.
Direct Taxes Paid
(Inc)/Dec in WC
CF from Operations
EO Income
CF from Op. incl EO Exp
(inc)/dec in FA
(Pur)/Sale of Investments
CF from Investments
Issue of Shares
(Inc)/Dec in Debt
Interest Paid
Dividend Paid
CF from Fin. Activity
Inc/Dec of Cash
Add: Beginning Balance
Closing Balance
26 February 2013
2010
18,236
2,476
-3,983
3,617
20,347
265
20,612
-7,870
965
-6,905
618
-534
-487
-4,632
-5,035
8,673
8,809
17,482
2011
19,387
2,978
-4,740
-1,600
16,025
-358
15,666
-5,600
-2,384
-7,983
846
948
-526
-5,741
-4,474
3,209
17,482
20,691
2012E
24,675
4,042
-6,048
522
23,192
-3,570
19,622
-2,465
-7,915
-10,381
848
-1,024
-757
-6,463
-7,395
1,846
20,691
22,537
2013E
26,428
4,600
-7,816
-3,853
19,359
0
19,359
-8,000
-2,920
-10,920
-117
861
-672
-7,181
-7,109
1,330
22,537
23,867
(INR Million)
2014E
30,496
5,350
-9,269
643
27,220
0
27,220
-10,000
-6,099
-16,099
0
897
-625
-8,078
-7,806
3,315
23,867
27,182
10

Ambuja Cements
N O T E S
26 February 2013
11

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Disclosure of Interest Statement
1. Analyst ownership of the stock
2. Group/Directors ownership of the stock
3. Broking relationship with company covered
4. Investment Banking relationship with company covered
Ambuja Cements
No
No
No
No
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