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5 Reasons Why Ambuja Doesn’t Deserve a Bashing 🥊

Updated: Feb 13, 2023

Unless you live under a rock, you must be aware of the Adani-Hindenburg debacle, causing worldwide outpour - some in panic and some rejoicing.

Key findings of the Hindenburg report revolved around stock manipulation, corruption, dangerous debt levels, a network of offshore entities and accounting irregularities.

This has caused several Adani Group stocks to lose more than a third to half in value. But, there’s a harmless stock that has been caught in the crossfire - Ambuja Cement.

And since it’s fallen along with the rest of the group, this might just be your golden chance to pick it up and add it to your portfolio.

Here are 5 reasons why Ambuja Cement stands out from the rest of its new siblings, and why it can be a good bet:

1. Ambuja has a legacy much different from Adani

Though now it's technically under the Adani banner, Ambuja Cement has a well-earned reputation, which precedes this acquisition. As a matter of fact, the famed Hindenburg report failed to mention Ambuja’s name across the entire 93-page expose!

It was previously owned by Holcim Group. Holcim by the way, a Swiss MNC, operates in more than 70 countries and is the largest cement maker in the world. Ambuja had been governed by a world-class conglomerate for more than 15 years.

Adani acquired Ambuja just last year (on 16th September 2022). It bought Holcim’s entire 63.11% stake along with related assets (and subsidiary ACC) for US$ 10.5 billion, making the acquisition Adani’s largest, and one of India’s largest in the infrastructure space.

According to news reports, there were several others in the race to acquire Ambuja including Aditya Birla Group (Ultratech) and JSW Group.

💡 Ambuja Cement has been a legitimately good asset, owned by an MNC and wanted by several.

2. Ambuja doesn't have the Adani modus operandi

All Adani Group companies have a similar pattern - high promoter holding, low free float, high leverage, high pledging, and sky-high valuations.

For Ambuja, all these parameters are very different and ‘normal’.

Ambuja Cement has no other significant promotors and almost 36% of its shares are on the open market (free float). This makes it a lot tougher for the promoters or anyone else to blatantly manipulate the stock price - which is the allegation against the Adani group.

Debt to Equity ratio is a fair indicator to measure the level of indebtedness a company is in, and it's safe to say that with Ambuja at 0.01x and the rest of the Adani pack averaging around 2.2x, the former is in a much safer position.

Even Ambuja’s current ratio (ability to pay short-term obligations) is at 1.5x, while a majority of Adani stocks are under 1x, showcasing its lower capacity to cover its short-term liabilities.

Unlike the Adani Group which has pledged 5.5% of listed units’ shares in loans, Ambuja has no stocks pledged. Pledging is when a promoter borrows using its own shares as collateral. This can be disastrous, in case the news of the open market sale of pledged shares comes out, the stock can easily free fall.

💡 With higher free float, negligible debt and pledging, and inexpensive valuations, Ambuja Cement has been a good-different from the rest of the Adani Group companies.

3. The cement sector is set for a good year

Budget 2023 has brought in good news for cement stocks. There were several announcements which will bode well for the sector:

- Increased capex outlay by 33.4% to Rs 10 lakh crore, of which almost 25% will go towards Road Transport and Highways and almost 50% to Railways

- 50-year interest-free loans to State governments to incentivize investments in infrastructure

- Establishment of Rs 10,000 crore Urban Infrastructure Development Fund (UIDF) to ramp up infrastructural growth in Tier-2 and Tier-3 cities

- Increased outlay for Pradhan Mantri Awas Yojana (an affordable housing initiative) by 66% to Rs 79,000 crore

Overall cement demand is likely to pick up in 2023 and 2024 as these initiatives start getting implemented.

Also, given the fact that the General Election is coming up in 2024, there will be a higher emphasis on the completion of projects and execution of ongoing infrastructure work. This is usual in any two years preceding an election year, and a sharp pick-up in cement demand has been observed in the same pattern, over the last 15 years.

Many cement stocks rose 1% to 4% immediately after the budget, but it failed to cheer up Ambuja Cement, it being an Adani Company.

💡 Ambuja Cement will be no less a beneficiary of the pick-up in cement demand in 2023 and 2024 and stands to capitalise on the massive infrastructure and capex push.

4. Ambuja is no longer a dead mouse

Over the last decade (2010-2020), Ambuja barely added any new capacity for several reasons:

- Initially, this was mainly because of Holcim’s inertia resulting from difficulties in merging ACC and Ambuja

- Later, Holcim started finding it unviable to invest in India given their view of low pricing and low ROEs in the Indian cement business

- And towards the end of their ownership, as a Group, Holcim started aiming for a more sustainable mix of their global operations by focusing more on RMC, roofing and green building solutions. Exiting Ambuja was part of the group’s ‘Strategy 2025’

Long story short, Holcim didn’t make any capacity expansion decisions, and Ambuja which was once the second largest player slipped to number 5, losing market share. In the process, investors lost hope and the stock traded at dismal valuations. Sans growth, a company wouldn't really get valued highly.

However, the fate for Ambuja did start to change, when Holcim (before selling the company) woke up and approved an aggressive expansion plan.

From 30 mtpa in 2021, Ambuja planned to reach 50 mtpa capacity in the medium term, through expansion on all fronts - greenfield, brownfield, new grinding capacity and debottlenecking.

After the acquisition, Adani put muscle into Ambuja Cement with a whopping Rs. 20,000 crore planned investment! It’s setting its sight on doubling consolidated capacity, along with subsidiary ACC, to a massive 140 mtpa in just five years. That's up from 70 mtpa at present.

💡 Even if the dreamy Adani-led expansion doesn't happen, Ambuja is already executing capacity expansion to 40 mtpa and has had its eyes set on 50 mtpa in the medium term from before it got acquired.

5. Profitability set to increase

With an increase in capacity, Ambuja will finally start seeing better revenue growth. But there are enough reasons for profits to increase at a faster rate than peers!

1.Cooling inflation Retail inflation, as measured by the Consumer Price Index (CPI), eased to 5.72% in December from 5.88% in the preceding month, within the RBI's 2-6% target band and at a 12-month low.

Prior to this, with inflationary pressure percolating to commodities, the company’s raw material costs rose by 33% YoY and their Power/Fuel expenses increased by 63% YoY as of 2QFY23! This affected Ambuja’s margins severely, causing PAT to fall by 94% YoY.

This will see some relief in 3QFY23 as fuel prices have fallen by 28% from July last year. Falling raw material prices will also aid profitability in the rest of 2023 and 2024.

2.Potential for efficiency gains Ambuja has a brand premium in the market with its large marketing set-up and pan-India presence, but its margins are lower than bulk players due to production inefficiencies.

Ambuja Cement plants are rusty, and are power guzzlers, with a higher power consumption per tonne of cement produced, and a lack of systems like waste heat recovery.

In June 2021, Ambuja announced to invest under its ‘Plants of Tomorrow’ programme, which aims to boost cement manufacturing capacity through enhanced plant optimisation, and improved plant availability.

This makes a plant usually 15-20% more operationally efficient compared to a conventional cement plant.

With these efficiency gains, the gap between Ambuja and its peers will be restored with huge potential for bottom-line growth over the next couple of years

💡 While inflation cooling down is common for the industry, Ambuja’s efficiency gains have the potential to make its profit growth industry-leading over the next two years.

Ambuja could be a hidden treasure in the sea of confusion that is the Adani Group. Adani Group companies had valuations of up to a whopping ~54x EV/EBITDA before the fall began, on the other hand, Ambuja was trading at a saner multiple of around 14x EV/EBITDA on a TTM basis.

Its stock price hovering around Rs. 350 per share puts the stock’s valuation at around 10x EV/EBITDA on FY24E basis. This makes it an intriguing investment opportunity in the cement sector with peers like Ultratech & Shree Cement trading at much higher multiples.

Adani itself had acquired the company at Rs. 385 per share. And from six months ago, things only look upward for Ambuja.

With or without Adani, the business has been built on world-class standards, there is capacity expansion already underway, the company is financially sound, and it has enough tailwinds to deliver industry-leading growth.

The current price and deep correction make it a stock worth keeping an eye on!

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