Holcims focus on deleveraging impacts expansions at Ambuja and ACC. However,we think a merger of the two would address capacity constraints and synergies could be 10% of the combined profit. We stay positive on Ambuja and ACC. Ambuja and ACC are not expanding enough despite being net cash.
Investments at Indian subsidiaries are closely controlled by Holcim,with investments >SFr20 mn requiring approval of Holcims executive committee. Ambuja and ACC are not expanding in western and northern India,despite high utilisations. A third of the new capex at ACC just replaces old plants. $1.2 billion cash at its Indian subsidiaries may not be utilised in the near term as it helps Holcim retain the investment grade rating and lower interest cost.
Holcims high leverage explains production discipline by ACC and Ambuja. Indian subsidiaries account for 20% of Holcims EBITDA. After 2008,Holcims dependence on EM subsidiaries has increased for its dividend payout though interest payments continue to be serviced through Europe and the US.
A merger of Ambuja and ACC could address capacity constraints. ACCs high utilisation in northern India could be addressed by Ambujas northern India plants. Ambujas Gujarat capacity could be freed up by using ACCs Wadi plant to supply to Mumbai. The combined entity would become the 11th largest globally by volume and 7th largest by market cap. By our estimates,synergies could increase the combined entitys profit by 10%.
Reiterate Neutral on RIL,target R892
In light of recent developments in gas pricing,we note that Street upgrades for RILs E&P business imply that bullish sentiments for this segment are making a comeback. However,our estimates indicate a bull-case scenario enhances the valuation of the segment by just R26/ share,not enough to warrant a re-rating.
As an impact of these developments,we think that bull-case valuation yields R26/ share upside to base case.
We have assumed a gradual revival in volumes from D6 from FY16 and a price of $8/ mmbtu after FY14,so the price of $8.4/ mmbtu has limited impact on our valuations for D6 (our current estimate: $5.3bn net to RIL,or R95.5/ share). A more aggressive production ramp-up after this decision,building in a more aggressive ramp-up and higher plateau of 60 mmscmd (base case 40 mmscmd),delivers a net NPV of $6.7bn,or R121/ share. We note that the investment estimates also change in this scenario,with $13bn estimated in the bull case as against our base-case estimate of $9.6bn. Gross recoverable reserves for the base case are 7.6 tcf vs 10.7 tcf in the bull case.
We assume an exploratory option value of R33/ share in addition to production uptick from D6. We note that at CMP,multiples of 12x FY15E earnings and 8.4x EBITDA imply a 10-15% premium over peers,underpinning our cautious stance. Reiterate Neutral,with our SoTP-based price target of R892,suggesting 5% upside.