Visit http://indiaer.blogspot.com/ for complete details AMBUJA CEMENT 3QCY10: Below estimates; Higher cost push impact margins; Downgrade EPS
Ambuja Cements’ (ACEM IN, Mkt Cap US$4.9b, CMP Rs142, Neutral) 3QCY10 operating performance is below estimate, with EBITDA margins of 18.1% (v/s est 21.7%) and PAT of Rs1.52b (v/s Rs1.95b). Key highlights include:
Decline in realizations translates into decline in revenues …
- Volumes grew by 6.1% to 4.35MT (v/s est 4.3MT), with 7.5% YoY growth in domestic volumes. Exports declined by 32% to 0.1mt.
- Realizations declined by 6.2% QoQ (~8.5% YoY) to Rs3,595 (v/s est Rs3,654/ton), as domestic realizations declined by 7% QoQ (~9% QoQ) but export realizations were stable at US$41/ton.
- As a result, revenues de-grew by 2.9% YoY to Rs15.6b (v/s est Rs15.7b).
Transport strike at HP plant to have limited impact in near future
- A strike by local transport union since October 7, 2010 at its HP plant has resulted in stoppage in production and dispatches. HP plant has ~5.5MT capacity (~20% of total capacity).
- However, it is carrying inventory of 15-20 days (due to heavy monsoon and flooding during Sep-10) which would help it to cater to demand.
- However, continuance of strike beyond 15-20 days could impact Ambuja’s 4QCY10 performance.
Real risk of cartel breaking, prices correcting
- Sustaining the current production arrangements over medium term would be difficult as demand-supply dynamics would be the key determinant of pricing.
- However, it becomes critical that such discipline sustains, especially in South, at least over next 2-3 months.
- With volumes yet to recover and large player continues losing market share, there is real risk of cartel breaking-up and cement prices correcting.
- Demand is expected to improve post December, which would drive price recovery. Hence, pricing discipline sustaining over next 2 months would provide higher base when prices recover.
- Also, recent price increases would help to recover sharp decline in prices in Jul-Aug’10. Based on the current prices, ACC’s 4QCY10 average realizations would be higher by 1-2% QoQ.
Downgrading estimates
- We are downgrading our EPS estimates for CY10 by 10% to Rs7.6 and 8.5% for CY11 to Rs8.3, to factor in for a) significantly below estimated 3QCY10 results and b) higher cost push.
- We maintain our cement price assumption of Rs2/bag QoQ increase in 4QCY10 and Rs5/bag average increase in CY11. Our EPS estimates would be at risk if current pricing discipline doesn’t sustain.
Valuations & view
- With full benefit of cost savings from new capacities and captive power plant now reflecting in its performance, Ambuja is expected to perform in-line with the industry.
- However, the stock trades at premium valuation of 17.2x CY11E EPS, 9.4x EV/EBITDA and US$157/ton. Maintain Neutral with target price of Rs149 (~10x CY11 EV/EBITDA).
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