Macquarie Research:: Ambuja Cements -No South, high costs = no gains

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Ambuja Cements
No South, high costs = no gains
Event
 CY10 results – below expectations: Ambuja reported CY10 results that
were 10% below our estimates. We are reducing our earnings further and are
well below consensus, as high costs and lower volumes neutralise slightly
higher cement prices. We maintain our Underperform rating and are reducing
our target price to Rs115 from Rs117.

Impact
 Weak results – hit by higher costs: Net sales, at Rs73.9bn, are up 4% YoY,
due to a 7% increase in volume, partially offset by a 2% decline in prices.
EBITDA, at Rs18.23bn, is down 2% from CY09 levels due to an increase in
costs, from Rs2,746/t in CY09 to Rs2,770 in CY10. Net profit, at Rs12.6bn, is
up 4% due to lower tax.
 Building in margin expansion: Cement prices have seen an increase since
January, but we expect unrelenting cost pressures due to an increase in rail
freight, higher thermal coal prices as well as the impact of higher transport
costs from the strike at the HP plant. We are building in a recovery to margin
at Rs813/t against the current-quarter margin of Rs611/t; however, risks
remain to the downside due to oversupply concerns.
 Still we are 27% below consensus estimates for CY11: The cement
industry has been able to get slightly better margins by sacrificing volume.
Also, costs are seeing all-round inflation. We believe consensus is lagging
behind in building these in, and we are now 27% and 21% lower for CY11 and
CY12, respectively.
 Capacity build to continue – but will lag industry growth rate: Ambuja is
adding 2mtpa of grinding capacity in CY11 and has also signed an agreement
with the Rajasthan government for installing a 2.2mtpa integrated cement
plant. However, we believe that unless Ambuja really picks up the pace, it will
lag the industry growth rate of 9–10%.
Earnings and target price revision
 We are reducing our estimates by 10% and 4% for CY11 and CY12,
respectively.
Price catalyst
 12-month price target: Rs115.00 based on a DCF methodology.
 Catalyst: Earnings downgrades; lower-than-expected profit recovery.
Action and recommendation
 Maintain Underperform: Ambuja is currently one of the most expensive
stocks in our coverage, trading at PERs of 19.5x and 17.5x on CY11 and
CY12E earnings estimates, respectively, and we do not believe it reflects the
no-earnings growth scenario we see over the next two years. In our view, the
only possible positive catalyst is merger with Associated Cements (ACC IN,
Rs985.85, Underperform, TP: Rs771.00), which also appears at least one
year away.