Visit http://indiaer.blogspot.com/ for complete details Ambuja Cements Ltd.
Better than peers but not good
enough
3Q results disappoint
Ambuja reported 3Q CY10 net profit at Rs1.5bn, down 52% YoY and 61% QoQ.
EBITDA fell 34% YoY and 53% QoQ; EBITDA/ton was ~Rs650. EBITDA margin
at 18% appears to be one of the worst-ever. 3Q results were below expectations
due to a combination of lower cement prices (down 6-8% YoY & QoQ) and higher
operating costs (up 2% YoY & 9% QoQ). Ambuja’s pricing and cost trends were
less damaging than those of ACC for 2 key reasons: 1) Ambuja has no volume
exposure to south India, and 2) in-sourcing of clinker offset other cost pressures.
Profit decline in CY11E, post relatively strong CY10
We have cut our profit forecasts by 14% for CY10E and 21% for CY11E to reflect
margin pressures. Post strong execution on costs and capacity expansion in
CY10, we forecast Ambuja’s earnings to decline ~8% YoY in CY11E led by weak
(-2% YoY) cement prices. We think the industry will be unable to sustain rational
pricing arrangements. The industry’s supply-demand balance is f’cast to remain
weak (~77% utilization) over next 12 months with pot’l downside if demand falters.
Relatively cautious on demand?
Ambuja’s 3Q press release talked of delayed spending on infrastructure and
housing projects as one of the reasons for recent demand slowdown. We find this
insight useful given general perception that the demand slowdown was seasonal.
Valuation premium seems exaggerated; underperform
Ambuja is currently trading at an EV/capacity of ~US$174/ton for CY11E implying
~35-40% premium vs replacement cost. We think the strong premium is unlikely
to sustain given falling RoE and downside risk to earnings. We are rolling forward
our replacement cost estimates from CY10 to CY11; our new PO of Rs85/sh
values Ambuja at an EV/capacity of ~US$95/ton (up 12% vs earlier) after
factoring replacement cost of ~US$125/ton (vs US$110/ton assumed earlier).
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