On Monday, JPMorgan (NYSE:JPM) initiated coverage on Ambuja Cements Ltd. (NS:ABUJ) (ACEM:IN) stock, assigning a Neutral rating and setting a price target of INR 590.00.
The firm's analysis highlighted that Ambuja Cements trades under 19x EBITDA and at 32.5x 1-year forward consensus P/E, which are valuations similar to those of UltraTech Cement (NS:ULTC) (UTCEM). Both companies are forecasted to have a comparable 3-year profit after tax (PAT) compound annual growth rate (CAGR).
The assessment pointed out that despite the similarities in growth expectations, Ambuja Cements' return ratios, specifically return on equity (RoE) and return on assets (RoA), are noticeably lower than those of UltraTech Cement.
Additionally, Ambuja Cements has experienced higher EBITDA/MT (earnings before interest, taxes, depreciation, and amortization per metric ton) contractions over the last four quarters, partly due to higher pricing contraction.
JPMorgan's report also mentioned that like UltraTech Cement, Ambuja Cements and its subsidiary ACC (NS:ACC) are expected to realize substantial cost savings, which have been partially included in the firm's models. The analysis suggests that Ambuja Cements should benefit from a revival in demand and pricing following the monsoon season.
However, the report also cautioned that there are risks associated with Ambuja Cements, including potential delays to planned growth or costly acquisitions. The price target provided by JPMorgan is based on a 20x multiple of Ambuja Cements' EBITDA, along with a 25% holding company discount applied to the valuations for ACC.
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