The global management of LafargeHolcim at its first capital markets day event (after the merger) disclosed their medium-term targets. By 2018, they target to increase FCF generation to a run rate of CHF3.5-4.0bn via cost synergies, capex reduction and other financial/tax synergies. From the India business standpoint, there are two key takeaways. First, India will contribute CHF150mn to a cost synergy target of CHF1,1 bn.
To meet the overall target of CHF1.1bn, it is essential that savings from the Indian operations are realised. Therefore, we believe there will be a greater focus from global management on achieving benefits from the Indian operations.
We believe this is positive for Ambuja as the Street has been skeptical in building these cost benefits in CY16F/CY17F estimates. Second, with stricter capex controls, particularly for new development projects, we believe there is a greater likelihood that over next two years, new cement capacity additions in India will be via the brownfield route rather than the greenfield route. Given ACEM is running at an average capacity utilisation of ~75%, which is quite evenly spread across regions, we do not think that capacity utilisation will be a constraint in delivering growth. We remain positive on Ambuja as we believe current valuations (on EV/tonne) are attractive, considering its strong retail franchise and size (second largest capacity, assuming 50% of ACC’s capacity).
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