Ambuja Cements: Lack of South exposure helps: Macquire

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Ambuja Cements : Lack of South exposure helps



Event
 3Q CY10 results – below expectation: Ambuja reported results which were
5% below ours and 54% below consensus estimates but still marginally better
than peers due to no exposure to South. We downgrade ACEM to
Underperform from Neutral and have marginally reduced our TP to Rs117
from Rs118 on reduced earnings. Valuations look stretched at 19x CY12E
PER.
Impact
 Weak results – lower costs help: Ambuja reported net sales at Rs15.6bn,
down 3% YoY as realisation was down 8.5% YoY though sales volume grew
by 6.1%. The company reported EBITDA at Rs3.2bn, at Rs651/t. Net profit
was at Rs1.52mn, down 61% QoQ and 52% YoY.
 Recovery expected but a muted one: We expect oversupply issue to keep
the cement prices subdued for at least another 12 months. We do take notice
of the recent attempts by the industry to artificially increase the cement prices,
but don’t expect these measures to have a lasting impact without fundamental
support.
 Still reducing earnings estimates: Ambuja’s costs have declined over the
last 2-3 quarters due to replacement of costly purchased clinker with captive
clinker. However, it is facing agitation at its Himachal plant with transport
unions demanding 50% increase in freight cost as stoppage of overlading has
flared up the costs. This along with rising coal prices will likely hurt margins.
 Downside to consensus earnings: Consensus is estimating EPS of Rs8.7
and Rs9.2per share for CY10 and CY11. Our new estimates are 6% and 23%
below current consensus forecasts.
Earnings and target price revision
 We are revising our estimates by -2%, -5% and +3% to Rs8.2, Rs7.1 and
Rs7.4 per share for CY10, CY11 and CY12, respectively.
Price catalyst
 12-month price target: Rs117.00 based on a DCF methodology.
 Catalyst: Earnings downgrades; lower than expected profit recovery.
Action and recommendation
 Downgrading to Underperform: Ambuja is currently one of the most
expensive stock in our coverage trading at 19.9x and 19.1x PER CY11 and
CY12E earnings estimate and it doesn’t reflect the no-earnings growth
scenario over next 2yrs. As we have written previously, the only possible
positive catalyst is merger with ACC (ACC IN, Rs982.6, UP, TP: Rs771),
which also appears at least 1yr away