Ambuja Cements slips on Credit Suisse downgrade; prefer ACC

NEW DELHI: Ambuja Cements Ltd plunged over 5 per cent after Credit Suisse downgraded the stock to "neutral" from "outperform" keeping its target price at Rs 205, the investment bank said in a report.


At current valuations the investment bank prefers ACC in the sector as the stock still provides upside from the potential merger synergies with Ambuja.

At 11:50 a.m.; Ambuja Cements recouped some of the morning losses and was trading 4.4 per cent lower at Rs 198. It hit a low of Rs 196.60 and a high of Rs 207 in trade today.

The stock was trading 2.09 per cent lower at Rs 1249.75. It had hit a low of Rs 1239 and a high of Rs 1277 in trade today. UltraTech Cements was trading 1.8 per cent lower at Rs 1898, while Grasim was down 0.8 per cent to Rs 2792.55.

Credit Suisse is of the view that the current low margins for the sector are not sustainable and therefore we build in both margin and volume recovery starting the Dec-13 quarter.

"The investment bank said that the stock (Ambuja Cements) is trading at its peak multiple and is already pricing in margin recovery in 2014 and part of the potential merger synergies with ACC Ltd," the report added.

Large caps are expected to maintain production discipline in the sector and therefore larger delta for them should be from margin expansion than volume growth.

However, given the historical PE band for Ambuja, the current price of Ambuja stock is already factoring in margin expansion next year, added the report.

Credit Suisse has slashed their estimates for Ambuja/ACC/Ultratech/Grasim by 10-19% for the current year to reflect weak price trend in the Jun-13 and Sep-13 quarters and cut Grasim's target price by 11 per cent to Rs3,280 to reflect the weak VSF prices.

We stay positive on the Indian cement sector and expect margins to improve as none of the capacities commissioned post 2010 are breaking-even on cost of capital and incremental supply additions are slowing down, added the Credit Suisse report.