Weekly Tactical Pick | Ambuja Cements
In this week’s tactical pick, our recommendation is Ambuja Cements, India’s third-largest cement maker. The stock has corrected almost 12 percent since mid-July and trades at a significant discount to its peers UltraTech & Shree Cement.
The financial performance in the first half of 2019 has been a mixed bag. Revenues have been stable despite the decline in cement volumes. Its EBITDA per tonne in Q2 touched multi-quarter highs due to higher cement prices.
Given the weakness in overall domestic environment, the volumes across the industry are anticipated to remain subdued in the near term. However, frontloading of infrastructure spending as indicated by the government would boost demand for the cement sector and aid the volumes recovery for Ambuja and its peers.
Realisations continue to remain firm across its key operating markets (north and west) and would support its top line in coming quarters. In terms of cost, the prices of petroleum coke and coal (down 15-20 percent YoY) have started to ease and this augurs well for its margins.
Also, the recent cost rationalisation initiatives such as railway siding project in Rajasthan and commencement of coal mining in Chhattisgarh would improve its operating metrics and enhance its margin profile. The combined impact of its cost rationalisation measures, along with decline in commodity prices, would start getting reflected in Ambuja’s earnings in the second half of 2020.
The stock is trading close to its 52-week lows and has taken support multiple times at around Rs 190-levels. At the current market price of Rs 196 per share, the stock trades at nearly 11.5 times CY20 estimated earnings.
Overall, Ambuja appears a strong defensive bet in these uncertain times and perfectly fits the high-quality business framework (strong balance sheet, healthy cash flow, high return ratios and improving cost metrics) of financial investors.Get access to India’s fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code “GETPRO”. Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.