Ambuja Cements – 4QCY2010 Result Update:: Angel Broking

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Ambuja Cements – 4QCY2010 Result Update

Angel Broking maintains a Neutral on Ambuja Cements.

For 4QCY2010, Ambuja Cements (Ambuja) reported a 7.0% growth in net profit

aided by lower taxation. However, realisations fell by 3.4% yoy, which coupled

with increase in power and fuel costs yoy resulted in the contraction of operating

margins. Going ahead, we expect Ambuja to report higher growth in dispatches,

aided by capacity additions and improvement in demand outlook. We have

incorporated CY2012 estimates in our financials. At current levels, the stock is

fairly priced, owing to which we maintain our Neutral view on the stock.

Bottom-line grows 7% yoy aided by lower taxes: For 4QCY2010, Ambuja’s

top-line remained flat yoy at `1,788cr, despite the 4.3% increase in dispatches to

5.04mn tonnes. The muted performance on the top-line front was on account of

the 3.4% decline in realisations to ~`3,548/tonne. OPMs fell by 543bp yoy to

19.7% on account of higher power and fuel costs, and lower realisation. Further,

during the quarter, the company was forced to purchase high-cost external clinker

due to the ~45-day truckers’ strike at its Himachal Pradesh plant, which too

impacted OPMs. The company’s per tonne power and fuel costs rose by 30.6%

yoy to `885. EBITDA/tonne of cement declined 29.2% yoy to `637. Net profit for

the quarter rose by 7% yoy to `258cr aided by lower effective tax rate.

Outlook and valuation: We expect Ambuja’s top-line to register 8.1% CAGR over

CY2010-12, with dispatches expected to record 9.6% CAGR on the back of

capacity addition. At current levels, the stock is trading at fair valuations -

EV/EBITDA of 9.2x and EV/tonne of US $136 on CY2012 estimates. Hence, we

maintain our Neutral view on the stock.

Investment arguments

Capacity addition to maintain robust volume growth

In CY2010, Ambuja expanded its clinker capacity by 4.4mn tonnes per annum

(mtpa) by setting up clinker plants with capacity of 2.2mtpa each at Bhatapara and

Rauri. The company also commissioned grinding units at Nalagarh and Dadri

(with capacities of 1.5mn tonnes each) during the year. Further, the company will

also be adding 2mtpa of total grinding capacity at Bhatapara and Maratha. Thus,

Ambuja, which currently has capacity of 25mn tonnes is expected to have overall

capacity of 27mn tonnes by the end of CY2011. In October 2010, the company

signed an agreement with the Rajasthan State Industrial Development and

Investment Corporation for setting up a 2.2mtpa clinkerisation plant at Nagauri

District. Going ahead, we expect capacity additions done by the company to drive

its growth.

Presence in high-growth regions to ensure better realisations

Ambuja currently derives close to 80% of its revenues from the western and

northern regions, with both the regions having almost equal shares. The remaining

20% is derived from the eastern region. We believe that the company’s significant

presence in the high-growth northern region would result in better profitability as

compared to players with major exposure to the south. The southern region is

currently suffering due to low demand in the key state of Andhra Pradesh and over

capacity.

New clinker capacities to aid margin expansion

Production at the company’s clinker plants has stabilised resulting in elimination of

external clinker purchase since 3QCY2010. This has resulted in boosting the

company’s OPMs, which was lowered by 400bp due to external purchase of close

to 1.7mn tonnes of high-cost clinker. Ambuja is also expected to record savings in

energy cost following commissioning of 66MW of new captive power capacities in

CY2010. The company, which commissioned a 33MW captive power at

Bhatapara, has set up another 30MW power plant at Ambuja Nagar taking its

overall captive power capacity beyond 400MW.

Outlook and valuation

We expect Ambuja to register 8.1% CAGR in top-line to over CY2010-12, with

dispatches expected to record 9.6% CAGR on the back of capacity addition.

At current levels, the stock is trading at fair valuations - EV/EBITDA of 9.2x and

EV/tonne of US $136 on CY2012 estimates. Hence, we maintain our Neutral view

on the stock.