Ambuja Cement -Realisations lower than expected : Rs 130 target; Emkay

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Ambuja Cement

Realisations lower than expected

HOLD

CMP: Rs 125                                        Target Price: Rs 130

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n     APAT at Rs2.14bn (-11.3% yoy ) below est of Rs2.52 bn, led by lower than expected realizations (Rs3584/t). Revenue grew 0.9%yoy- volume growth of 3.3%, realisation down 2.4% yoy 

n     EBITDA at Rs 3.14bn (-27.7%yoy, below est–Rs4.2 bn) -  EBITDA/t at Rs629 down 30%yoy, 3.3% qoq – Downgrade CY11 EPS by 10.7%. Introduce CY12 EPS at Rs9.6

n     Cement offtake improves in Jan – prices hiked Rs15-20/bag in Jan-Feb. Sustainability of cement price over medium term remains uncertain, as demand yet to see significant pick up

n     Stock down 13% in last one month – however valuations at PER of 15.6X & EV/ton of USD133 still not in comfort zone. Maintain HOLD with price target of Rs130

Revenues grow 0.9% yoy, Volumes +3.3% – Realizations down 2.4%

ACL’s revenue at Rs17.88bn stayed flat yoy as volume growth of 3.3% yoy (4.99mnt)

was negated by fall of 2.4% yoy in realizations (Rs3585/t vs estimates of Rs3699/t).

Realizations declined 2.4% yoy and 0.3% qoq to Rs 3584/t as Ambuja’s Key North &

Eastern Markets saw price declines. Volumes for CY10 improved 6.4% to 19.95mnt with

domestic sales volumes increasing by 8% while exports declined 33.3% yoy. On a CY

basis realizations declined by 1.6% yoy to Rs3704/t.

EBITDA down by 27.7% - below estimates led by lower realisations

EBITDA at Rs 3.14bn declined 27.7%yoy due to lower than expected realizations as

ACL’s key markets of North & Eastern region witnessed price cuts in the month of

December. With sharp fall in realizations, ACL’s EBITDA/t at Rs 629 declined by

30%yoy and 3.3%qoq with EBITDA margins contracting 694bps yoy to 17.6%.

On the cost front visible sequential trends were:

¾ RM costs/t +7.1% qoq as Ambuja had to rely on clinker purchases from the market

as it Rauri Clinker unit was shutdown for major part of the quarter on account of

transport strike.

¾ Freight costs /t at Rs817 +3.8% qoq- due to increase in rail freight

¾ Other Exp at Rs3.7bn +12.4% qoq led by higher packaging costs

APAT at Rs2.14bn down 11.3%yoy

With 38% jump in other income and lower tax rate (18.1% as compared to 39% in

Q4CY09) ACL’s APAT for the quarter at Rs2.14bn (our estimate Rs2.52 bn) declined

11.3%yoy lower than the EBIDTA decline of 27.7%. Reported PAT at Rs2.5bn grew

4.1% yoy (this includes extraordinary item of Rs371 mn of tax expenses credit relating

to earlier years which we have treated as one time and accounted for it below the line).

Cement prices hiked Rs15-20/bag in Jan- Feb

Helped by improvement in cement offtake and season logistical bottleneck (Wagon

shortage due to diversion of wagons to food grains & other crop) cement prices have

witnessed a series of hikes ( Rs8-10/bag in January and a Rs10/bag hike in February)

across all regions. With recent price hikes taken by cement producer across the country, we

estimate average cement prices have reached ~Rs240-245/bag. Our CY11E numbers for

ACL (EPS of Rs8) are modeled at Rs240/bag.

Downgrade FY11E Earnings

On account of lower than expected realizations, we are downgrading our earnings

estimates for ACL by 10.7% for CY11 (EPS of Rs 8).We are introducing CY12 estimates

with EPS of Rs9.6.

Valuations at PER of 15.6X and EV/t of USD133, still not in comfort zone -

Maintain HOLD

Though cement prices have been hiked across all regions, we continue to believe that

sustainability of cement prices remains uncertain in medium/long term as the cement

demand growth FY11YTD ~5% has now emerged as bigger concern than the overcapacity

in the system. Also as highlighted earlier international coal prices which have jumped to

USD120/t are expected to increase cost pressures and remains key concern for UTCL.

With the stock trading at PER of 15.6X, 8.5X EV/EBITDA and EV/ton of USD133 on CY11

numbers, we do not see valuation comfort, considering uncertainty on earnings. Maintain

HOLD with price target of Rs130.