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Ambuja Cements (ACEM)
Cement
Margins contract despite selective price hikes. Ambuja Cement (ACEM) reported
sedate earnings, with margins coming under pressure despite selective price increases in the key
market of West. We continue to remain pessimistic on the prospects of ACEM with the industry
facing headwinds in the form of (1) lower cement prices, (2) inflating input costs with rising
prices of imported coal, and (3) muted demand environment (+4.3% YTD). Maintain SELL rating
and target price of Rs108/share. ACEM currently trades at US$161/ton on CY2011E production.
Operating results in line, though lower tax rate leads to outperformance
ACEM reported revenues of Rs17.9 bn (1% yoy, 14.4% qoq), operating profit of Rs3.1 bn (-
27.2% yoy, 11.1% qoq) and net income of Rs2.1 bn (-11.1% yoy, 41.1% qoq) against our
estimate of Rs17.6 bn, Rs3.1 bn and Rs1.8 bn, respectively. Volumes at 4.9 mn tons (8% yoy,
11% qoq) were marginally ahead of estimates (4.8 mn tons) while average realization at
Rs3,621/ton (-6.5% yoy, 3.1% qoq) was in line with our estimates. Higher-than-estimated raw
material cost (Rs335/ton against our estimate of Rs143/ton) was offset by lower employee and
power and fuel cost.
Net income was boosted by (1) higher other income, (2) prior-period tax credit of Rs371 mn, and
(3) lower effective tax rate of 18.1% (adjusted for prior-period tax credit).
Price improvement not sustaining, macro remains weak for the sector
Average cement prices in ACEM’s key market of West improved by Rs17/bag sequentially though
prices in North and East registered a sequential decline of Rs2/bag and Rs13/bag, respectively,
yielding a 3% qoq improvement in blended realizations. We remain cautious on the pricing
environment as reflected in the price decline seen towards the end of December, as the absence of
volume growth (4.3% YTD) worsens the demand-supply mismatch. Besides the absence of volume
growth and pricing pressures, cement companies will likely have to grapple with higher input
cost—as rising prices of imported coal and crude will further sap into the profitability of cement
companies.
Maintain SELL with a target price of Rs108/share
We maintain SELL on ACEM with a target price of Rs108/share based on CY2011E valuations.
ACEM is currently trading at 7.1X CY2011E EBITDA and EV/ton of US$161/ton on CY2011E
production as against a replacement cost of US$110-120/ton. Our target price of Rs108/share
implies EV/EBITDA of 6X and EV/ton of production of US$135/ton on CY2011E earnings and
production, respectively.
Key highlights of 4QCY10 results
Volumes – ACEM’s volumes during 4QCY10 improved to 4.9 mn tons (11% qoq and
8% yoy) driven by strong growth in October which tapered off in later months following
the general industry trend.
Realizations – ACEM’s average realizations improved marginally by Rs107/ton
sequentially to Rs3,621/ton in 4QCY10 driven by improved pricing in the its key market of
West. Average cement prices in West improved by Rs10/bag from Rs211/bag in 3QCY10
to Rs221/bag in 4QCY10.
Raw material cost – raw material cost registered a sharp sequential jump of 144% from
Rs137/ton to Rs335/ton. The increase in raw material cost is likely reflective of the
transport strike at the company’s facilities in Himachal Pradesh which could have
increased the dependence on purchased clinker and correspondingly reflects in lower
power and fuel cost.
Power and fuel cost – power and fuel cost declined to Rs903/ton (-9% qoq, 26% yoy).
We note that due to an average 1-2 months of coal inventory and an additional lag
between contract and delivery of imported coal, increase in coal prices affects the income
statement with a 3-6 month lag, and expect a more pronounced effect of surging coal
prices over the next few quarters.
Freight cost – sequential increase of 7.3% in freight cost (Rs826/ton in 4QCY10 against
Rs770/ton) reflecting the increased freight during the quarter driven by hike in fuel prices.
Effective tax rate – effective tax rate for the quarter was significantly lower at 18.1%
even after adjusting for prior-period credit of Rs371 mn.
Surging coal prices – impact likely over the next few quarters
International coal prices have surged over the past few months with Richard Bay index
touching a peak of US$128/ton in mid-January. Ambuja Cement, with ~30-40%
dependence on imported coal, will likely see the impact of higher coal prices in 1QCY11E.
We currently factor an average landed price of US$115/ton for CY2011E.
Balance sheet for CY2010 – capex of Rs7.9 bn during CY2010
ACEM incurred a total capex of Rs7.9 bn during CY2010 most of which was incurred on
incremental grinding capacity of 2 mtpa likely to commission in CY2011E. We note that
during CY2010, ACEM commissioned 4.4 mtpa of clinker capacity along with 3 mtpa of
grinding capacity and 63 MW of captive power units. ACEM significantly reduced its debt
from Rs1.7 bn as of December 2009 to Rs650 mn as of December 2010, leading to net
cash increase of Rs16.8 bn and additional liquid investments estimated at Rs6 bn.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Ambuja Cements (ACEM)
Cement
Margins contract despite selective price hikes. Ambuja Cement (ACEM) reported
sedate earnings, with margins coming under pressure despite selective price increases in the key
market of West. We continue to remain pessimistic on the prospects of ACEM with the industry
facing headwinds in the form of (1) lower cement prices, (2) inflating input costs with rising
prices of imported coal, and (3) muted demand environment (+4.3% YTD). Maintain SELL rating
and target price of Rs108/share. ACEM currently trades at US$161/ton on CY2011E production.
Operating results in line, though lower tax rate leads to outperformance
ACEM reported revenues of Rs17.9 bn (1% yoy, 14.4% qoq), operating profit of Rs3.1 bn (-
27.2% yoy, 11.1% qoq) and net income of Rs2.1 bn (-11.1% yoy, 41.1% qoq) against our
estimate of Rs17.6 bn, Rs3.1 bn and Rs1.8 bn, respectively. Volumes at 4.9 mn tons (8% yoy,
11% qoq) were marginally ahead of estimates (4.8 mn tons) while average realization at
Rs3,621/ton (-6.5% yoy, 3.1% qoq) was in line with our estimates. Higher-than-estimated raw
material cost (Rs335/ton against our estimate of Rs143/ton) was offset by lower employee and
power and fuel cost.
Net income was boosted by (1) higher other income, (2) prior-period tax credit of Rs371 mn, and
(3) lower effective tax rate of 18.1% (adjusted for prior-period tax credit).
Price improvement not sustaining, macro remains weak for the sector
Average cement prices in ACEM’s key market of West improved by Rs17/bag sequentially though
prices in North and East registered a sequential decline of Rs2/bag and Rs13/bag, respectively,
yielding a 3% qoq improvement in blended realizations. We remain cautious on the pricing
environment as reflected in the price decline seen towards the end of December, as the absence of
volume growth (4.3% YTD) worsens the demand-supply mismatch. Besides the absence of volume
growth and pricing pressures, cement companies will likely have to grapple with higher input
cost—as rising prices of imported coal and crude will further sap into the profitability of cement
companies.
Maintain SELL with a target price of Rs108/share
We maintain SELL on ACEM with a target price of Rs108/share based on CY2011E valuations.
ACEM is currently trading at 7.1X CY2011E EBITDA and EV/ton of US$161/ton on CY2011E
production as against a replacement cost of US$110-120/ton. Our target price of Rs108/share
implies EV/EBITDA of 6X and EV/ton of production of US$135/ton on CY2011E earnings and
production, respectively.
Key highlights of 4QCY10 results
Volumes – ACEM’s volumes during 4QCY10 improved to 4.9 mn tons (11% qoq and
8% yoy) driven by strong growth in October which tapered off in later months following
the general industry trend.
Realizations – ACEM’s average realizations improved marginally by Rs107/ton
sequentially to Rs3,621/ton in 4QCY10 driven by improved pricing in the its key market of
West. Average cement prices in West improved by Rs10/bag from Rs211/bag in 3QCY10
to Rs221/bag in 4QCY10.
Raw material cost – raw material cost registered a sharp sequential jump of 144% from
Rs137/ton to Rs335/ton. The increase in raw material cost is likely reflective of the
transport strike at the company’s facilities in Himachal Pradesh which could have
increased the dependence on purchased clinker and correspondingly reflects in lower
power and fuel cost.
Power and fuel cost – power and fuel cost declined to Rs903/ton (-9% qoq, 26% yoy).
We note that due to an average 1-2 months of coal inventory and an additional lag
between contract and delivery of imported coal, increase in coal prices affects the income
statement with a 3-6 month lag, and expect a more pronounced effect of surging coal
prices over the next few quarters.
Freight cost – sequential increase of 7.3% in freight cost (Rs826/ton in 4QCY10 against
Rs770/ton) reflecting the increased freight during the quarter driven by hike in fuel prices.
Effective tax rate – effective tax rate for the quarter was significantly lower at 18.1%
even after adjusting for prior-period credit of Rs371 mn.
Surging coal prices – impact likely over the next few quarters
International coal prices have surged over the past few months with Richard Bay index
touching a peak of US$128/ton in mid-January. Ambuja Cement, with ~30-40%
dependence on imported coal, will likely see the impact of higher coal prices in 1QCY11E.
We currently factor an average landed price of US$115/ton for CY2011E.
Balance sheet for CY2010 – capex of Rs7.9 bn during CY2010
ACEM incurred a total capex of Rs7.9 bn during CY2010 most of which was incurred on
incremental grinding capacity of 2 mtpa likely to commission in CY2011E. We note that
during CY2010, ACEM commissioned 4.4 mtpa of clinker capacity along with 3 mtpa of
grinding capacity and 63 MW of captive power units. ACEM significantly reduced its debt
from Rs1.7 bn as of December 2009 to Rs650 mn as of December 2010, leading to net
cash increase of Rs16.8 bn and additional liquid investments estimated at Rs6 bn.
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