25 July 2013
2QCY13 Results Update |
Sector: Cement
Ambuja Cements
BSE Sensex
20,091
Bloomberg
Equity Shares (m)
M.Cap. (INR b)/(USD b)
52-Week Range (INR)
1,6,12 Rel. Perf. (%)
S&P CNX
5,991
ACEM IN
1,542.2
294.6/5.0
221/163
-3/-4/-5
CMP: INR191
TP: INR173
Neutral
2QCY13 results above estimates, but ACC acquisition draws all attention
2QCY13 profitability beats estimates on better realizations and cost savings:
Ambuja Cements' (ACEM) 2QCY13 realization surprised positively with 0.6%
QoQ increase (-5.7% YoY) to INR4,297 (v/s est of INR4,171). This coupled with
lower than estimated cost (at INR3,396/ton, -INR16/ton QoQ) driven by higher
pet coke usage, translated into higher EBITDA/ton by ~INR42 QoQ (-INR382
YoY) to INR901. PAT declined 30% YoY (-10% QoQ) to INR3.3b (v/s est INR2.8b).
Holcim revamps India structure:
Holcim has announced restructuring of its
India operations, whereby ACEM would acquire 50.01% stake in ACC from the
parent in part cash (~INR35b) and part share swap (net issue of ~435.3m share
or 28.2% dilution). This deal was based on current valuations for both the
companies.
EPS/RoCE accretive for ACEM in due course; holding company discount, an
immediate drag:
Management expects the merger to result in meaningful
synergistic benefits (quantified at INR8-9b), to be achieved within two years.
We estimate the merger to be EPS and RoCE accretive for ACEM as it would
deploy ACEM's idle cash of INR35b (earning 6-8% yield), on acquiring ACC's
assets at attractive valuations of ~US$110/ton. Nonetheless, ACEM's near term
valuation may witness pressure due to holding company discount that the
Street would give to its 50.01% stake in ACC and weakening of balance sheet
strength due to cash outgo.
Upgrade estimates, maintain Neutral:
We upgrade EPS for CY13E/CY14E by
10.9%/8.9% to INR8.2/10.8 respectively to factor marginally lower volume
and better realization assumptions. The stock trades at 10.2x CY14E EV/EBITDA
and USD140/ton. Maintain
Neutral
with a target price of INR173 (~9x CY14E
EV/EBITDA).
Financials & Valuation (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
24.7
15.4
10.0
23.1
56.9
18.3
27.6
49.8
19.1
3.4
10.2
152
94.2
18.4
12.6
8.2
-0.1
60.4
13.9
20.1
51.9
23.4
3.2
13.7
149
109.0
24.1
16.6
10.8
7.5
65.9
17.0
24.4
48.7
17.7
2.9
10.2
140
Jinesh Gandhi
(Jinesh@MotilalOswal.com) + 91 22 3982 5416
Sandipan Pal
(Sandipan.Pal@MotilalOswal.com); +9122 3982 5436
Investors are advised to refer through disclosures made at the end of the Research Report.
1

Ambuja Cements
Volumes decline but resilience in QoQ realizations surprise positively
ACEM's 2QCY13 net sales fell by 8.6% YoY (-8% QoQ) to INR23.4b (v/s est INR24b).
This was driven by volume decline of 3.1% YoY (-8% QoQ) to 5.46mt (v/s est.
5.7mt).
Realization surprised positively with 0.6% QoQ increase (-5.7% YoY) to INR4,297
v/s est of INR4,171.
Trend in volumes and realizations
Income statement (INR/ton)
Net Realization
Raw Material
Staff Cost
Power & Fuel
Freight
Other exp
Total Cost
EBITDA
2QCY13
4,297
189
242
1,018
1,125
822
3,396
901
2QCY12 YoY (%) 1QCY13 QoQ (%)
4,556
-6.3
4,271
0.6
206
98.8
410
-53.9
220
-7.7
203
19.3
1,064
-9.4
963
5.7
1,042
3.8
1,082
4.0
741
1.7
754
9.0
3,273
4.2
3,412
-0.5
1,283
-33.0
859
4.9
Source: Company, MOSL
Profitability beats estimates on higher-than-expected realizations and lower
cost
Cost was lower than estimate and stood at INR3,396/ton (-INR16/ton QoQ) due to
higher pet coke utilization resulting into energy cost savings.
EBITDA declined by 32% YoY (-4% QoQ) to INR4.9b (v/s est INR4.2b), while PAT fell
by 30% YoY (-10% QoQ) to INR3.3b (v/s est INR2.8b).
This translates into margin expansion of 0.9pp QoQ to 21% (v/s est 17.4%) and
improvement in EBITDA/ton by ~INR42 QoQ (-INR382 YoY) to INR901.
Trend in profitability
Source: Company, MOSL
Other updates
The board approved setting up of 2.17mt of Greenfield clinkerization projects at
Nagaur (Rajasthan) and three grinding units of 1.5mt each at Dadri (UP), Marwar
Mundwa (Rajasthan), and Osara (MP), with total estimated capex of INR35b.
It recommended an interim dividend of INR1.4/share.
25 July 2013
2

Ambuja Cements
ACEM and Holcim India to merge; ACEM becomes holding company of ACC
[A] The transaction:
Holcim (parent company of ACC and Ambuja) has announced major restructuring
of its India operations which includes:
Merger of its 100% subsidiary Holcim India with ACEM.
Holcim India's 50.01% stake in ACC will be transferred to ACEM, making ACEM
the holding company of ACC.
Acquisition of Holcim India's 50.01% stake in ACC by ACEM will take place in a two-
step process comprising:
Step I: ACEM to acquire a 24% stake in Holcim India for INR35b in cash.
Step II: Holcim India to merge into ACEM, as ACEM will issue 584m shares to
Holcim (parent) for the remaining 76%.
Holcim India's 9.8% stake in ACEM to be cancelled.
Post merger, Holcim will hold 61.39% in ACEM and ACEM will hold 50.01% in ACC.
As an implied valuation, the deal derives ACEM/ACC a swap ratio of 6.6, and Holcim
India/ACEM a swap ratio of 7.4.
ACEM intends to increase its stake in ACC by up to 10% over a period of 24 months
following completion of the transaction and not triggering an open offer. In-
principle approval of ACEM board is in place for a maximum amount of INR30b,
which implies a 30% premium to ACC's current share price.
Post and pre-transaction structure
[B] Understanding the valuations: Holcim India valued at INR145b; financially no
impact on Holcim, while impact on ACEM 2-15% (downside) based on holding
company discount
Based on the current holding structure, Holcim India's stake in ACC and ACEM is
valued at INR145b, which is largely the consideration to paid in cash and ACEM
equity to Holcim (parent) by ACEM.
The transaction does not have any material financial impact on Holcim's current
valuation (INR266b) as shown in the below illustration.
Impact on ACEM's valuation hinges on the holding company discount that the
Street would give to its 50.01% stake in ACC. Based on a scenario analysis below,
we estimate 2-15% downside from the current market price for 10-50% holding
company discount.
25 July 2013
3

Ambuja Cements
Current structure and valuations
ACC
ACEM
Valuation of Holcim India
ACEM
ACC
Direct holding of ACC
Holcim (Parent) valuation of India assets
* Based on CMP on 24th July-13
Mcap (INR b)* Holcim India stake
231
50.0%
296
9.8%
296
231
40.8%
0.3%
Value (INR b)
115.5
28.9
144.4
120.7
0.7
121.3
265.8
STEP 1 - Purchase of 24% stake in HOLCIM INDIA
Cash Outflow (INR Bn)
35
Total valuation of Holcim India
144
Implied value of 24% stake
35
STEP 2 - Purchase of 76% stake in HOLCIM India
Shares Issued to HOLCIM (Mn)
584.4
CMP
189.0
Implied value of 76% stake
110
Total consideration
145
Transaction impact on ACEM
(INR b)
Pre deal valuation
296
Value of ACC
115.5
Cash Outflow (INR Bn)
35
Holding Co discount
20%
Post deal valuation
423
ACEM: Holding company discount (on ACC)
sensitivity
Holding Fair value Fair value
Co discount (INR b)
(INR/sh)
10%
365
185
20%
353
179
30%
342
173
40%
330
167
50%
319
161
Downside
(%)
-2.4
-5.5
-8.6
-11.7
-14.7
Transaction impact on Holcim (INR b)
Shares Issued to HOLCIM (Mn)
584.4
Existing No. of Shares (Mn)
1,544.4
Holcim India holding (9.76% Stake)
150.7
Holcim direct holding (40.77% stake) 629.6
NewACEM share Base (Mn)
2,128.8
Dilution
37.8%
Cancelled (Mn) Cancellation of
9.7% Stake
150.7
Adjusted ACEM share Base (Mn)
1,978
New stake of Holcim (%)
61.4
Pre deal valuation
266
Post deal valuation
266
Based on 61.4% stake in ACEM
(plus 50.01% stake in ACC)
231
Based on cash inflow
35
Change in valuation
0.2%
[C] Rationale of the merger: (a) guides for INR8-9b of synergistic benefits,
(b) deploying idle cash on value accretive assets addition
Holcim's management believes the transaction will derive meaningful synergistic
benefit quantified as INR8-9b, to be achieved within two years of completion of
the transaction. This includes:
Supply Chain Optimization
INR3.6-4.2b
Shared Services and fixed cost INR4.2-4.8b
The merger will be EPS/RoCE accretive for ACEM shareholders as it would deploy
the idle cash of INR35b (earning 6-8% yield), on acquiring ACC's assets at attractive
valuations of ~US$110/ton, which is at a steep discount to the current market
transaction value (recent M&A) and Greenfield capex cost.
It would also double the size of capacity under control for ACEM, along with
operational synergies such as sharing individual strong brand, logistics, cost centers
and distribution network.
We estimate the merger would be marginally EPS and RoCE accretive for ACEM
even without synergistic benefits and renders further upgrade potential on
achieving synergies.
25 July 2013
4

Ambuja Cements
Expect phased realization of meaningful synergies
However, as an implication of the merger, we note certain changes as follows:
Holcim's stake in ACC is down ~20% (50.3% to 31%) - could it lead to parent's
interest in propelling future growth more through ACEM (than ACC) and only
increasing the payout in ACC?
Total effective capacity under control for Holcim (as on date) will be down by
2.7mt to 27.7mt, against the proceeds of INR35b (USD190/ton).
Our estimate suggests the merger would be marginally EPS and RoCE accretive for ACEM without synergy, while benefits from
synergies would render additional upgrade potential.
ACC and ACEM current financial projections
ACEM
Revenue (INR b)
EBITDA (INR b)
EBIT (INR b)
Other income (INR b)
PAT (INR b)
EPS
Capital employed (INR b)
Capacity (MT)
RoCE (%)
CY14
109
24
19
5.4
17
10.8
102.4
30
23
CY15
126
29
23
6.4
20
13.2
113.8
30
26
ACC
Revenue (INR b)
EBITDA (INR b)
EBIT (INR b)
Other income (INR b)
PAT (INR b)
EPS
Capital employed (INR b)
Capacity (MT)
RoCE (%)
CY14
129
21
14
5.3
14
50.0
84
31
23
CY15
147
26
19
5.8
17
72.7
93
34
27
Assuming no synergy
Combined (ACEM + 50% ACC)
Revenue (INR b)
EBITDA (INR b)
EBIT (INR b)
Other income (INR b)
PAT (INR b)
EPS
EPS upgrade (%)
Capital employed (INR b)
RoCE (%)
Change in RoCE (pp)
25 July 2013
CY14
173
34
26
5.2
21
11
0.7
109
24
1.0
CY15
200
42
32
6.5
27
14
3.5
125
27
1.1
Assuming synergy of INR8b divided between ACC and ACEM in 50:50
in CY15
Combined (ACEM + 50% ACC)
CY15
Revenue (INR b)
200
EBITDA (INR b)
48
EBIT (INR b)
38
Other income (INR b)
6.5
PAT (INR b)
31
EPS
16
EPS upgrade (%)
19.8
Capital employed (INR b)
125
RoCE (%)
30
Change in RoCE (pp)
4.5
5

Ambuja Cements
Upgrade estimates, maintain Neutral
We upgrade EPS for CY13E/CY14E by 10.9%/8.9% to INR8.2/10.8 respectively to
factor:
Higher realizations (-INR7/bag YoY v/s earlier est. of -INR9/bag in CY13).
Lower volume (1% v/s earlier est. of 2.3% in CY13).
Lower cost/ton estimates due to savings in energy and RM cost.
Our estimates are yet to effect for acquisition of ACC as entire process is expected
to take 9-12 months to complete.
The stock trades at 10.2x CY14E EV/EBITDA and USD140/ton. Maintain
Neutral
with
a target price of INR173 (~9x CY14E EV/EBITDA).
Revision in estimates (INR b)
Rev
94.2
18.4
12.6
8.2
CY13E
Old
94.4
16.6
11.4
7.4
Chg (%)
-0.2
10.9
10.9
10.9
Rev
109.0
24.1
16.6
10.8
CY14E
Old
109.3
22.1
15.2
9.9
Chg (%)
-0.3
8.7
8.9
8.9
Source: MOSL
Net Sales
EBITDA
Net Profit
EPS (INR)
25 July 2013
6

Ambuja Cements
Ambuja Cements: an investment profile
Company description
Ambuja Cement, a part of the Holcim group, is the third
largest cement company in India with total capacity of
28.8mt under its control. It is one of the lowest cost
producers of cement, with focus on structurally sound
markets of North, West and East. It is also the largest
exporter of cement from India.
Recent developments
Holcim has announced restructuring of its India
operations, which includes (a) merger of its 100%
subsidiary Holcim India with ACEM and (b) transfer
of Holcim India's 50.01% stake in ACC to ACEM, making
ACEM the holding company of ACC.
The board has recommended an interim dividend of
INR1.4/share.
Key investment arguments
Best positioned geographically (#1 and #2 in North
and West, respectively) to benefit from current
upturn in cement prices.
Geographical location gives flexibility to choose
between domestic and export market.
Financially well placed (zero net debt) to drive
further consolidation in the industry.
Valuation and view
The stock trades at 10.2x CY14E EV/EBITDA and
USD140/ton.
Maintain
Neutral
with a target price of INR173 (~9x
CY14E EV/EBITDA).
Sector view
We believe we have already witnessed bottom-of-
the-cycle utilization and profitability and it should
gradually improve hereon, given sustainable
demand drivers.
Structural increase in cost base would necessitate
higher cement prices.
Revival in cement demand would be key catalyst for
the stock's performance.
Key investment risks
Weakening of balance sheet strength on INR35b of
cash outgo in Holcim India merger.
Holding company discount the company is expected
to get on ACC stake.
Lack of timely capacity addition could restrict volume
growth, if volume recovery is sharp.
Levy of royalty by Holcim over and above the payment
of technical services fees.
Comparative valuations
Ambuja
Cements
23.4
17.7
3.2
2.9
149
140
13.7
10.2
ACC
23.9
16.4
2.9
2.7
99
92
12.6
8.1
UltraTech
Cement
21.1
15.8
2.9
2.5
136
129
10.9
8.6
EPS: MOSL forecast v/s consensus (INR)
MOSL
Forecast
8.2
10.8
Consensus
Forecast
9.9
11.7
Variation
(%)
-16.9
-8.0
P/E (x)
CY13E
CY14E
P/BV (x)
CY13E
CY14E
EV/Ton (x)
CY13E
CY14E
EV/EBITDA (x) CY13E
CY14E
CY13
CY14
Target price and recommendation
Current
Price (INR)
191
Target
Price (INR)
173
Upside
(%)
-9.4
Reco.
Neutral
Stock performance (1 year)
Shareholding pattern (%)
Jun-13
Promoter
Domestic Inst
Foreign
Others
50.6
10.2
32.0
7.3
Mar-13
50.6
8.6
33.5
7.4
Jun-12
50.2
12.4
29.9
7.5
25 July 2013
7

Ambuja Cements
Financials and Valuation
25 July 2013
8

Ambuja Cements
N O T E S
25 July 2013
9

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Ambuja Cements
No
No
No
No
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