Visit http://indiaer.blogspot.com/ for complete details EARNINGS REVIEW
Ambuja Cements (ABUJ.BO)
Neutral
Below expectations; higher fuel costs a negative surprise
What surprised us
Ambuja reported 3QFY10 net income of Rs1.5 bn (-61% qoq, -52% yoy),
23% below our expectations, and 37% below Reuters consensus. Top-line
growth was down 3% yoy, as lower realizations (-8% yoy) offset modest
volume growth (+6% yoy). While the top-line was broadly in line with our
expectations, it was the higher costs that surprised to the downside. At the
operating level, EBITDA per ton came in at Rs695 (GSe: Rs840), down 38%
yoy, 42% qoq. Despite minimal clinker purchases in 3QFY10, EBITDA
margin was down 934 bp yoy on lower realizations, coupled with higher
fuel (+30% yoy) and other expenses (+10% yoy). According to the
company, the higher fuel costs were due to lower linkage coal supplies
and increased dependence on higher priced imported coal. We lower our
FY10 EPS estimate by 10.8% to account for higher costs, and fine-tune our
FY11-FY12 estimates.
What to do with the stock
While Ambuja’s earnings were disappointing, we believe that Ambuja
continues to be better-placed within our India cement coverage universe to
weather deteriorating fundamentals, given its healthy volume growth (+8%
yoy for FY10E), reduced high-cost clinker purchases and zero exposure to
the most vulnerable Southern region. While current valuations have run
ahead of fundamentals (12-mo fwd EV/RC of 174% vs. mid cycle of 130%),
we maintain our Neutral rating and 12-m EV/RC-based TP of Rs103 on lack of
near-term catalysts. Upside risks: lower-than-expected decline in pricing.
Downside risks: lower-than-expected despatch growth and higher costs.
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