Broker's call - Ambuja Cements: Buy

Morningstar Equity

Ambuja Cements (Buy)

CMP: ₹211

Target: ₹262 (fair value)

Ambuja Cements continues to show better relative pricing power and starts reaping benefits of cost cutting. Second quarter results were marked by a strong 6.4 per cent growth in blended realisations and 7.6 per cent growth in volume over the prior year, respectively. Strong price growth is in-line with our thesis that Ambuja Cements holds pricing power in its key markets. The company continued to face depressed demand owing to subdued economic activity. This was reflected in fall in the adjusted EBITDA margins to 21.6 per cent, down 0.4 per cent over previous year. However, in our view, the lower than expected decline in margins is also supported by cost rationalisation efforts by the company, which have started to show benefits. Ambuja’s narrow economic moat is underpinned by its strong pricing power in key markets. The industry-level entry barriers that benefit the company 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.

Long term demand for building materials remains attractive as Government pursues its high spending on infrastructure and housing.