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One offs lead to higher than estimate PAT
Ambuja Cement’s (ACEM) reported Q4CY10 PAT at INR 2.58 bn was higher than
our estimate of INR 1.9 bn largely due to: (a) tax credit of INR 371 mn related
to provisions made in earlier years; and (b) exceptional income of INR 65 mn
due to reduction in provisioning for recognising slow-moving inventories of
spares compared to the amount provided in Q1CY10. These are one-off items
and unlikely to appear again in the coming quarters. However, the reported
revenue at INR 17.9 bn and EBITDA at INR 3.1 bn were broadly in line with our
estimates.
Realisations disappoint with 1.3% decline Q-o-Q
Blended realisations at INR 3,549 per tonne disappointed with a decline of 1.3%
Q-o-Q due to absence of the company in South (where average cement prices
increased sequentially by over 25%) and weaker pricing environment in East
(where average cement prices declined ~5% Q-o-Q and the company has ~25%
sales exposure). Cement volumes jumped 15.9% Q-o-Q and 6.6% Y-o-Y at 5.04
mt for the quarter.
Costs: A mixed bag
ACEM purchased clinker worth INR 246 mn to make up for the loss of production
in Himachal Pradesh due to the transporters’ strike while the internal material
transfer cost also increased 23% Q-o-Q. As a result, the raw material cost per
tonne at INR 512 catapulted 63% Q-o-Q. Power & fuel cost per tonne (adjusting
to cement produced from clinker purchased) dipped ~8.5% Q-o-Q. According to
management, the decline is due to higher efficiency of new plants. Average cost
of imported coal was ~USD 110 per tonne for the quarter, which is estimated to
increase to ~USD 125 in Q1CY11. Freight cost per tonne soared 1.9% Q-o-Q and
with rail freight being revised upwards by 4% w.e.f. 27th Dec, 2010, it will
increase further. EBITDA/tonne at INR 624 dipped 4% Q-o-Q.
Outlook and valuations: Expensive valuations; maintain ‘REDUCE’
Though in the near term (owing to peak season demand), cement prices across
regions may remain firm, we expect sharp declines in the lean season. With
sector fundamentals estimated to remain weak over the next two years, Ambuja
Cements’ current valuations of USD 134 EV/tonne and 8.2x EV/EBITDA CY11E
appear expensive. We maintain our ‘REDUCE’ recommendation on the stock
with ‘Sector Underperformer’ rating.
Expansion update
The company has signed an agreement with Rajasthan State Industrial Development and
Investment Corporation to set up a 2.2 mtpa clinkerisation plant in Nagaur district,
Rajasthan. We believe the order for this plant is yet to be placed. Additionally, two
grinding units of 1 mtpa each at Bhatapara (Chattisgarh) and Maratha plant
(Maharashtra) are likely to be commissioned during Q1CY11, taking the total installed
capacity of the company to 27 mtpa.
Company Description
ACL is India’s third-largest cement manufacturer with current installed capacity of 27 mn
tpa. With a pan-India presence, ACL has ~10% market share in India. With ~46% stake
in the company, Holcim Group is at the helm of the affairs of the company.
Investment Theme
The subdued industry scenario expected over the next two years does not support the
current expensive valuations of the company. With 5% CAGR decline in EBITDA/tonne
and 3.2% in PAT estimated over CY10—12, we maintain our Reduce recommendation on
the stock.
Key Risks
Prices in the markets of the company increase much higher than our expectations
Power and fuel cost decline significantly.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
One offs lead to higher than estimate PAT
Ambuja Cement’s (ACEM) reported Q4CY10 PAT at INR 2.58 bn was higher than
our estimate of INR 1.9 bn largely due to: (a) tax credit of INR 371 mn related
to provisions made in earlier years; and (b) exceptional income of INR 65 mn
due to reduction in provisioning for recognising slow-moving inventories of
spares compared to the amount provided in Q1CY10. These are one-off items
and unlikely to appear again in the coming quarters. However, the reported
revenue at INR 17.9 bn and EBITDA at INR 3.1 bn were broadly in line with our
estimates.
Realisations disappoint with 1.3% decline Q-o-Q
Blended realisations at INR 3,549 per tonne disappointed with a decline of 1.3%
Q-o-Q due to absence of the company in South (where average cement prices
increased sequentially by over 25%) and weaker pricing environment in East
(where average cement prices declined ~5% Q-o-Q and the company has ~25%
sales exposure). Cement volumes jumped 15.9% Q-o-Q and 6.6% Y-o-Y at 5.04
mt for the quarter.
Costs: A mixed bag
ACEM purchased clinker worth INR 246 mn to make up for the loss of production
in Himachal Pradesh due to the transporters’ strike while the internal material
transfer cost also increased 23% Q-o-Q. As a result, the raw material cost per
tonne at INR 512 catapulted 63% Q-o-Q. Power & fuel cost per tonne (adjusting
to cement produced from clinker purchased) dipped ~8.5% Q-o-Q. According to
management, the decline is due to higher efficiency of new plants. Average cost
of imported coal was ~USD 110 per tonne for the quarter, which is estimated to
increase to ~USD 125 in Q1CY11. Freight cost per tonne soared 1.9% Q-o-Q and
with rail freight being revised upwards by 4% w.e.f. 27th Dec, 2010, it will
increase further. EBITDA/tonne at INR 624 dipped 4% Q-o-Q.
Outlook and valuations: Expensive valuations; maintain ‘REDUCE’
Though in the near term (owing to peak season demand), cement prices across
regions may remain firm, we expect sharp declines in the lean season. With
sector fundamentals estimated to remain weak over the next two years, Ambuja
Cements’ current valuations of USD 134 EV/tonne and 8.2x EV/EBITDA CY11E
appear expensive. We maintain our ‘REDUCE’ recommendation on the stock
with ‘Sector Underperformer’ rating.
Expansion update
The company has signed an agreement with Rajasthan State Industrial Development and
Investment Corporation to set up a 2.2 mtpa clinkerisation plant in Nagaur district,
Rajasthan. We believe the order for this plant is yet to be placed. Additionally, two
grinding units of 1 mtpa each at Bhatapara (Chattisgarh) and Maratha plant
(Maharashtra) are likely to be commissioned during Q1CY11, taking the total installed
capacity of the company to 27 mtpa.
Company Description
ACL is India’s third-largest cement manufacturer with current installed capacity of 27 mn
tpa. With a pan-India presence, ACL has ~10% market share in India. With ~46% stake
in the company, Holcim Group is at the helm of the affairs of the company.
Investment Theme
The subdued industry scenario expected over the next two years does not support the
current expensive valuations of the company. With 5% CAGR decline in EBITDA/tonne
and 3.2% in PAT estimated over CY10—12, we maintain our Reduce recommendation on
the stock.
Key Risks
Prices in the markets of the company increase much higher than our expectations
Power and fuel cost decline significantly.
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