While shares of ACC and Ambuja Cements slipped 13 percent and 16 percent, respectively, in May, UltraTech was able to restrict the fall to 6 percent.
ACC and Ambuja also witnessed a sharper decline on a year-to-date basis. As a result, ACC has been excluded from the MSCI index, and Ambuja Cement from the NSE Nifty 50 index. UltraTech, on the other hand, is still part of the Nifty 50.
The Valuation Story
The country’s largest cement maker scores higher on three key valuation parameters – price to earnings ratio, enterprise value to earnings before interest, tax, depreciation and amortisation ratio; and enterprise value per tonne – as compared to ACC and Ambuja Cement.
While UltraTech trades at a 13 percent premium to its two-year average, ACC and Ambuja Cements trade at a discount of 21 percent and 37 percent, respectively, according to BloombergQuint’s calculations.
Despite higher valuations, most analysts prefer UltraTech Cement over ACC and Ambuja Cements, even as their return potential may be higher after the recent correction.
Here are three likely reasons:
1. Aggressive Capacity Addition Plans
UltraTech Cement has been adding capacities not just organically but also inorganically. The company, which acquired Jaypee Group’s assets last year and Century Textiles Ltd.’s cement business more recently, is also in the race for assets of insolvent Binani Cement Ltd.
The ambitious capacity addition plan is a distinguishing factor, according to Hemant Nahata, assistant vice-president-research, IIFL Wealth & Asset Management. In contrast, the proposed merger between ACC and Ambuja Cements has been shelved.
All the three companies are, however, planning organic capacity addition, IIFL said.
- Ambuja Cements is expected to complete the first phase of 1.7 million tonne capacity addition in Rajasthan by 2020.
- ACC is expected to add 1.5 million tonnes per annum in West Bengal by the second half of the ongoing financial year.
- UltraTech Cement is expected to add 4 MTPA at Bara, Uttar Pradesh this financial year.
- UltraTech Cement to add 3.5 MTPA at Dhar, Madhya Pradesh by March 2020.
2. Capacity Utilisation
UltraTech Cement has better utilisation levels despite adding new capacity.
3. Geographical Mix
UltraTech Cement already has an edge over Ambuja Cements in terms of pan-India presence. The acquisition of Century Textiles’ cement business will further strengthen its position in the central region and help it maintain leadership in the east and the west. The company also has a better pricing power in the three regions.
Century Textiles’ assets are located close to those of UltraTech’s and don’t offer a new market. Synergies will be due to higher pricing of UltraTech brand, procurement and logistical advantages.Credit Suisse Note On UltraTech Cement