AMBUJA CEMENTS Q3CY10 (Sept results) Rich valuations:: Edelweiss

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􀂄 PAT below estimate as realisation slides below expectation
Ambuja Cements’ (ACL) Q3CY10 PAT of INR 1.52 bn was below our estimates (INR
2.27 bn). Volumes dipped 18% Q-o-Q with ~INR 12/bag realisation drop leading
to 24% revenue decline. Volume was lower on account of subdued construction
activity during the monsoon and lower demand from the north and the central
markets. Subdued demand growth, increased cost of imported coal and increasing
non-availability of linkage coal caused significant pressure on margins. EBITDA/t
declined 42.4% Q-o-Q to ~INR 651, lowest in the past three years. Other income
includes income from sale of power of INR 3.7 mn and on account of pre-payment
of an outstanding deferred sales tax loan.
􀂄 Higher cost pressure to impact margins
Raw material cost per tonne was down to INR 314/t on account of stock
adjustment and higher clinker production this quarter. Power and fuel costs
increased Y-o-Y from INR 849/t to INR 1017/t partly as a result of higher clinker
production and partly because of increasing coal cost. Other expenditure increased
17% Q-o-Q on account of plant maintenance and higher selling and distribution
costs. Production and despatches from Suli and Rauri plants in Himachal Pradesh
(2.8 mtpa capacity, 13% of the total) have stopped due to transport strike.
However, the company believes it will have only marginal impact on total volumes.
􀂄 Higher depreciation on commissioning of new capacities
Depreciation increased 41.5% Y-o-Y, to INR 1 bn, on account of the
commissioning of new capacities towards Q1CY10 end. Annual tax will remain at
30-31%. During the last quarter, ACL commissioned a 30 MW thermal CPP at its
Ambujanagar unit in Gujarat.
􀂄 Outlook and valuations: Rich; maintain ‘REDUCE’
We maintain our negative view on the sector as we believe oversupply will
continue to hamper realisations. However, part of the recent price hike of INR
10-50/bag is likely to be sustained. Further, ACL’s raw material cost has declined
higher than our expectations post the full integration on account of clinker. Thus,
we upgrade our CY11E earnings by 13%. However, ACL’s current valuation at
EV/tonne of USD 169 CY11E, are most premium in the sector.
Accordingly, we maintain our ‘REDUCE’ recommendation on the stock. On
relative basis, we rate it ‘Sector Underperformer’