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Ambuja Cements Limited
Underweight
ABUJ.BO, ACEM IN
Operating earnings below estimates; even after 25% correction, valuations still embedding 'corporate event' in our view
• Dec quarter operating earnings below estimates driven by HP strike
impact: ACEM’s Q4 tends to be noisy as the company does not report Q4
separately and also the tax line sees write-backs/provisioning as it is the year
end. Hence for the Dec quarter we track the EBITDA more closely. CY10Q4
EBITDA at Rs3.5bn (+17% q/q, -22% y/y) was below our estimates of Rs4.6bn
and BBRG consensus of Rs4.1bn. The operating earnings miss was mainly
driven by the impact of the transportation strike in company’s HP plants. As a
result ACEM had to purchase clinker and also saw an increase in the freight
costs/MT, thus depressing margins. EBITDA/MT stood at Rs700/MT, broadly
flat q/q (Q3 at Rs695/MT) similar to ASP’s which were also flat q/q.
• Price increase benefits to be mostly offset by cost increases: We expect cost
pressures to sustain at least over the next 3 quarters, mainly on thermal coal
prices. Thermal coal prices increased nearly 14% in the Dec quarter averaging
$108/MT and continue to trend upward to $130/MT levels currently. We see
this as an industry wide problem given Indian cement industry is increasingly
reliant on imported/e-auction coal.
• Cement prices have been increasing in select regions, but demand is
anemic: Cement prices have been increasing in select markets in North/West
India, and holding in South India. March-11E quarter is likely to benefit from
the price increases. However, demand continues to be anemic in the country.
While AP is the key laggard, demand is lack luster in the other key states as
well. We attribute this to the completion of mega infra projects and not much
progress on new projects. We see downside risks to our industry demand growth
estimates of 7% and 9% in FY11/FY12.
• 25% stock price correction does reduce valuation premium, however we
believe current valuations still pricing in some 'corporate event': We cut our
CY11E EBITDA estimates by 17% (expect 10% EBITDA decline y/y) mainly
as we build in lower volume growth and higher costs. ACEM has declined 25%,
since Nov-10 (compared to -12% for NIFTY and -12% for UTCEM), but at
current valuations of EV/MT $145/MT and EV/EBITDA 10.0x CY11E v/s
$118/MT and 8.1x FY12E for UTCEM, we believe ACEM is still pricing in
some sort of 'corporate event', which we continue to believe is that of a merger
with ACC. We remain UW with a revised March-12PT of Rs110 based on
$120/MT CY12E EV/MT. Key risk is sharp recovery in cement prices and/or
demand, or merger with ACC.
Weak results as HP strike impacts performance
Ambuja reported 4QCY10 EBITDA of Rs3.5bn (+17% q/q, -22% y/y) was below
our estimates of Rs4.6bn and consensus estimate of Rs4.1bn. Realizations for the
quarter was flat. Volumes in the quarter were strong (+16% q/q) as the lower
production in HP plants was made good by ACEM’s other plants. The HP truckers
strike in Ambuja’s plants (from early Oct to Nov) impacted results as the company
purchased clinker and also saw an increase in freight cost/MT. EBITDA/MT for the
Dec quarter was Rs700/MT mostly flat q/q. ACEM’s Q4 tends to be noisy as the
company does not report Q4 separately and also the tax line sees writebacks/
provisioning as it is the year end. While there have been prices increases in
Jan-11, this would be offset by the higher costs mainly coal and freight costs
(thermal coal prices at $130/MT currently vs. $108/MT average in 4Q).
Industry view- While headline capacity addition has peaked,
ramp up has not; anemic demand key worry
We do not see large capacity addition over the next 2 years and believe capacity
addition in the industry has peaked for the time being. Having said this, utilization
levels at many of the new plants is significantly below industry utilization levels of
75-80% and in our view ramp up of these capacities is yet to take place. However,
the key worry is the anemic state of demand. Indian cement consumption of 10%
CAGR over FY06-10 was driven by large mega projects in key states like urban
housing in Gurgaon, new airport and Commonwealth games spending in Delhi and
housing projects in UP. Private and public spending drove demand in key South
India states of AP and TN. All these states currently do not have any large capex
projects and we see downside risks to our FY12E cement demand growth of 9%.
Cement prices in our view are likely to remain choppy, resulting in sharp earnings
volatility. We believe sustained industry earnings power is likely post cap utils of
85%+.
Valuations and Key risks
We cut our CY11E EBITDA estimates by 17% (expect 10% EBITDA decline y/y)
mainly as we build in lower volume growth and higher costs. ACEM has declined
25% since Nov-10 (compared to -12% for NIFTY and -12% for UTCEM), but at
current valuations of EV/MT $145/MT and EV/EBITDA 10.0x CY11E v/s $118/MT
and 8.1x FY12E for UTCEM, we believe ACEM is still pricing in some sort of
'corporate event', which in our view is that of a merger with ACC. We remain UW
with a revised March-12PT of Rs110 based on $120/MT CY12E EV/MT (We
increase our valuation multiple to $120/MT v/s $110/MT as the capacities have been
commissioned and hence we now value ACEM at replacement cost). Key risk is
sharp recovery in cement prices and/or demand, or merger with ACC.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Ambuja Cements Limited
Underweight
ABUJ.BO, ACEM IN
Operating earnings below estimates; even after 25% correction, valuations still embedding 'corporate event' in our view
• Dec quarter operating earnings below estimates driven by HP strike
impact: ACEM’s Q4 tends to be noisy as the company does not report Q4
separately and also the tax line sees write-backs/provisioning as it is the year
end. Hence for the Dec quarter we track the EBITDA more closely. CY10Q4
EBITDA at Rs3.5bn (+17% q/q, -22% y/y) was below our estimates of Rs4.6bn
and BBRG consensus of Rs4.1bn. The operating earnings miss was mainly
driven by the impact of the transportation strike in company’s HP plants. As a
result ACEM had to purchase clinker and also saw an increase in the freight
costs/MT, thus depressing margins. EBITDA/MT stood at Rs700/MT, broadly
flat q/q (Q3 at Rs695/MT) similar to ASP’s which were also flat q/q.
• Price increase benefits to be mostly offset by cost increases: We expect cost
pressures to sustain at least over the next 3 quarters, mainly on thermal coal
prices. Thermal coal prices increased nearly 14% in the Dec quarter averaging
$108/MT and continue to trend upward to $130/MT levels currently. We see
this as an industry wide problem given Indian cement industry is increasingly
reliant on imported/e-auction coal.
• Cement prices have been increasing in select regions, but demand is
anemic: Cement prices have been increasing in select markets in North/West
India, and holding in South India. March-11E quarter is likely to benefit from
the price increases. However, demand continues to be anemic in the country.
While AP is the key laggard, demand is lack luster in the other key states as
well. We attribute this to the completion of mega infra projects and not much
progress on new projects. We see downside risks to our industry demand growth
estimates of 7% and 9% in FY11/FY12.
• 25% stock price correction does reduce valuation premium, however we
believe current valuations still pricing in some 'corporate event': We cut our
CY11E EBITDA estimates by 17% (expect 10% EBITDA decline y/y) mainly
as we build in lower volume growth and higher costs. ACEM has declined 25%,
since Nov-10 (compared to -12% for NIFTY and -12% for UTCEM), but at
current valuations of EV/MT $145/MT and EV/EBITDA 10.0x CY11E v/s
$118/MT and 8.1x FY12E for UTCEM, we believe ACEM is still pricing in
some sort of 'corporate event', which we continue to believe is that of a merger
with ACC. We remain UW with a revised March-12PT of Rs110 based on
$120/MT CY12E EV/MT. Key risk is sharp recovery in cement prices and/or
demand, or merger with ACC.
Weak results as HP strike impacts performance
Ambuja reported 4QCY10 EBITDA of Rs3.5bn (+17% q/q, -22% y/y) was below
our estimates of Rs4.6bn and consensus estimate of Rs4.1bn. Realizations for the
quarter was flat. Volumes in the quarter were strong (+16% q/q) as the lower
production in HP plants was made good by ACEM’s other plants. The HP truckers
strike in Ambuja’s plants (from early Oct to Nov) impacted results as the company
purchased clinker and also saw an increase in freight cost/MT. EBITDA/MT for the
Dec quarter was Rs700/MT mostly flat q/q. ACEM’s Q4 tends to be noisy as the
company does not report Q4 separately and also the tax line sees writebacks/
provisioning as it is the year end. While there have been prices increases in
Jan-11, this would be offset by the higher costs mainly coal and freight costs
(thermal coal prices at $130/MT currently vs. $108/MT average in 4Q).
Industry view- While headline capacity addition has peaked,
ramp up has not; anemic demand key worry
We do not see large capacity addition over the next 2 years and believe capacity
addition in the industry has peaked for the time being. Having said this, utilization
levels at many of the new plants is significantly below industry utilization levels of
75-80% and in our view ramp up of these capacities is yet to take place. However,
the key worry is the anemic state of demand. Indian cement consumption of 10%
CAGR over FY06-10 was driven by large mega projects in key states like urban
housing in Gurgaon, new airport and Commonwealth games spending in Delhi and
housing projects in UP. Private and public spending drove demand in key South
India states of AP and TN. All these states currently do not have any large capex
projects and we see downside risks to our FY12E cement demand growth of 9%.
Cement prices in our view are likely to remain choppy, resulting in sharp earnings
volatility. We believe sustained industry earnings power is likely post cap utils of
85%+.
Valuations and Key risks
We cut our CY11E EBITDA estimates by 17% (expect 10% EBITDA decline y/y)
mainly as we build in lower volume growth and higher costs. ACEM has declined
25% since Nov-10 (compared to -12% for NIFTY and -12% for UTCEM), but at
current valuations of EV/MT $145/MT and EV/EBITDA 10.0x CY11E v/s $118/MT
and 8.1x FY12E for UTCEM, we believe ACEM is still pricing in some sort of
'corporate event', which in our view is that of a merger with ACC. We remain UW
with a revised March-12PT of Rs110 based on $120/MT CY12E EV/MT (We
increase our valuation multiple to $120/MT v/s $110/MT as the capacities have been
commissioned and hence we now value ACEM at replacement cost). Key risk is
sharp recovery in cement prices and/or demand, or merger with ACC.
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