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Ambuja Cements Ltd.
Strong, but richly valued
„Strong results but others narrow profit differential in 1Q
Ambuja reported 1Q CY11 EBITDA at Rs6.1bn, up 95% QoQ. Results were a tad
better than expectations due to cost savings and clinker sales. Ambuja’s EBITDA
per ton in 1Q CY11 stood at Rs1084 i.e. 10-20% higher than ACC & UltraTech.
We expect Ambuja’s earnings to be less volatile versus peers but do not see
valuation upside. Stock valuations at ~US$195-200/ton are already 35-40%
higher than peers. We have adjusted our estimates and maintain underperform
Strong start lifts CY11 profit; expect cement prices to fall
Current cement prices are higher than 1Q CY11 average even though prices
eased a tad in April after climbing to historical highs in March 2011.This strong
(Jan-Apr) start drives our ~28% EBITDA upgrade for CY11. However, we do not
expect current prices to sustain and believe cement prices could fall sharply over
the next 2 quarters due to steep excess supply.
Continued demand weakness could test rational behaviour
Our industry forecast of 9% demand growth for yr-ending Mar ’12 vs 5% in yrending Mar ’11 seems optimistic and so far, there are no visible upside catalysts.
Despite factoring demand recovery, we foresee YoY drop in the industry’s cap.
utilization. We share the industry’s concern that continued demand weakness
may test rational behaviour as producers may be reluctant to cut prodn. further
Cost mgt. & lack of exposure to south may cushion profits
In 1Q, both Ambuja and ACC delivered QoQ cost savings. We think Ambuja’s
cost structure is more sustainable even if demand slowsdown. Ambuja’s earnings
may also be relatively cushioned by the lack of any volume exposure to south
India where risk of pricing cuts seems highest.
Price objective basis & risk
Ambuja Cements (AMBUF)
We have a price objective of Rs85/sh for Ambuja. We value the company at
CY11E EV/capacity of around US$95/ton based on a 20-25% discount to the
industry's current replacement cost of US$120-125/ton. Trough discount vs
replacement cost was steeper at 40-45% in the previous cycle but structurally
improved RoEs and significantly healthier balance sheets may warrant lower
discount in current cycle. The 20-25% discount is in line with the average (rather
than trough) discount witnessed through the previous downturn (1997-2002).
Downside risk to our PO stems from unforeseen rise in energy prices. Upside
possibilities would stem from rational pricing by producers and unforeseen easing
in energy prices, especially coal.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Ambuja Cements Ltd.
Strong, but richly valued
„Strong results but others narrow profit differential in 1Q
Ambuja reported 1Q CY11 EBITDA at Rs6.1bn, up 95% QoQ. Results were a tad
better than expectations due to cost savings and clinker sales. Ambuja’s EBITDA
per ton in 1Q CY11 stood at Rs1084 i.e. 10-20% higher than ACC & UltraTech.
We expect Ambuja’s earnings to be less volatile versus peers but do not see
valuation upside. Stock valuations at ~US$195-200/ton are already 35-40%
higher than peers. We have adjusted our estimates and maintain underperform
Strong start lifts CY11 profit; expect cement prices to fall
Current cement prices are higher than 1Q CY11 average even though prices
eased a tad in April after climbing to historical highs in March 2011.This strong
(Jan-Apr) start drives our ~28% EBITDA upgrade for CY11. However, we do not
expect current prices to sustain and believe cement prices could fall sharply over
the next 2 quarters due to steep excess supply.
Continued demand weakness could test rational behaviour
Our industry forecast of 9% demand growth for yr-ending Mar ’12 vs 5% in yrending Mar ’11 seems optimistic and so far, there are no visible upside catalysts.
Despite factoring demand recovery, we foresee YoY drop in the industry’s cap.
utilization. We share the industry’s concern that continued demand weakness
may test rational behaviour as producers may be reluctant to cut prodn. further
Cost mgt. & lack of exposure to south may cushion profits
In 1Q, both Ambuja and ACC delivered QoQ cost savings. We think Ambuja’s
cost structure is more sustainable even if demand slowsdown. Ambuja’s earnings
may also be relatively cushioned by the lack of any volume exposure to south
India where risk of pricing cuts seems highest.
Price objective basis & risk
Ambuja Cements (AMBUF)
We have a price objective of Rs85/sh for Ambuja. We value the company at
CY11E EV/capacity of around US$95/ton based on a 20-25% discount to the
industry's current replacement cost of US$120-125/ton. Trough discount vs
replacement cost was steeper at 40-45% in the previous cycle but structurally
improved RoEs and significantly healthier balance sheets may warrant lower
discount in current cycle. The 20-25% discount is in line with the average (rather
than trough) discount witnessed through the previous downturn (1997-2002).
Downside risk to our PO stems from unforeseen rise in energy prices. Upside
possibilities would stem from rational pricing by producers and unforeseen easing
in energy prices, especially coal.
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