UltraTech, Ambuja Cements To Defy Industry Downtrend, Says Morgan Stanley
Both UltraTech and Ambuja should see strong capacity additions driving strong volume growth with economies of scale, it says.
Morgan Stanley is bullish on UltraTech Cements Ltd. and Ambuja Cements Ltd. due to the strong capacity additions despite seeing limited upside triggers for the industry.
Although the near-term move may be sideways, the medium-term outlook remains robust as the demand-led margin expansion story is intact. With capacity-share gains and the expected cost-improvement capabilities, the brokerage has raised the target prices as there is a "bull case in play" for UltraTech and Ambuja, according to a note.
UltraTech and Ambuja have been doing better than other large peers, led by prospective market-share gains on the back of several inorganic-expansion announcements, it said in a note dated July 12. "Other large stocks, on the other hand, underperformed as the industry continues to struggle with (an) extended period of cement price rollbacks."
As demand is expected to remain relatively lukewarm during monsoon, Morgan Stanley does not see any material price hikes happening over the next few months.
There are limited risks to the consensus earnings for the next financial year and margin expansion will be mainly led by cost improvement, supported by nominal price hikes, the brokerage said. "Against this backdrop, companies with pan-India franchises and cost-improving capabilities look relatively better-positioned, we believe."
Both UltraTech and Ambuja should see strong capacity additions driving strong volume growth with economies of scale. This, coupled with various cost-improving initiatives, means that both these companies should continue to see margin expansion despite a weak cement prices environment, the note said.
As margins expand, Morgan Stanley said there could be upside risks to valuations and both these stocks could trade at around peak valuations across cycles.
Morgan Stanley has an 'overweight' rating on UltraTech and has raised the target price to Rs 13,620 per share from the earlier Rs 11,600, implying a potential upside of 17% from the previous close. The brokerage upgraded Ambuja Cements to 'overweight' from 'equal weight' and hiked the target price to Rs 775 per share from Rs 665 apiece, implying a potential upside of 17% from the previous close.
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Ambuja's stock rose as much as 1.72% in early trade to Rs 688.1 apiece on the NSE. It was trading 1.15% higher at Rs 684.3 apiece, compared to a 0.18% advance in the benchmark Nifty as of 10:06 a.m.
The stock has risen 64% in the last 12 months and 31% on a year-to-date basis. The relative strength index was at 57.
Twenty-six out of the 40 analysts tracking the company have a 'buy' rating on the stock, seven recommend 'hold' and as many suggest 'sell', according to Bloomberg data. The average of 12-month analyst price targets implies a potential downside of 1.2%.
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UltraTech's stock rose as much as 2.02% during the day to Rs 11,836.6 apiece on the NSE. It was trading 1.12% higher at Rs 11,731.9 apiece, compared to a 0.20% advance in the Nifty as of 10:10 a.m.
The stock has risen 42% in the last 12 months and 11.6% on a year-to-date basis. The relative strength index was at 64.
Thirty-four out of the 42 analysts tracking the company have a 'buy' rating on the stock, four recommend 'hold' and as many suggest 'sell', according to Bloomberg data. The average of 12-month analyst price targets implies a potential downside of 3.8%.
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