Ambuja Cements -Substantial increase but no confidence:: Macquarie Research

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Ambuja Cements
Substantial increase but no confidence
Event
 1QCY11 results – better than expected: Ambuja Cements reported a strong
QoQ recovery in profits driven by all-time high cement prices. We have increased
our estimates sharply to reflect these and also increase our target price from
Rs115 to Rs129. We think fundamental headwinds remain very strong, demand is
weak, costs are rising and prices could come under pressure as we expect
oversupply will prevail for another two years. Maintain Underperform.

Impact
 Strong results – helped by higher realisations: Net Sales at Rs22.1bn were
up 11% YoY, due to a 7% increase in volume and 4% increase in realisation.
EBITDA at Rs6.1bn was down 2% YoY, though has shown a 95% growth over
last quarter. Net profit at Rs4.1bn is down 12% YoY and up 58% QoQ.
 Cement price increase extraordinary but not sustainable: The cement price
in 1QCY11 is up Rs400/t over last quarter. Prices as of early April are another
Rs320/t higher over the 1QCY11 average. All India prices now average at an
all-time high of Rs277/bag! We are hearing that demand is really struggling now
and already some price correction has started. We believe the trend will remain
downwards over the next 4-6 months as we enter the seasonally weak season.
 Margins to decline faster as costs rise: We expect an increase in coal prices
by Coal India to impact costs by around Rs90-100/t. Also, we expect an
increase in diesel prices around late May’11 which would push up freight costs.
Also, as we enter the lean season, lower volumes will likely make costs look
even higher during the next two quarters. For ACEM, we are building in EBITDA
per ton of Rs972 for CY11 as compared to Rs1,084 reported this quarter.
 Merger with ACC – no immediate synergies: It's been widely reported that
ACEM and ACC are likely to merge given the same promoter “Holcim”. We
don't think both companies are ready for a merger as yet; hence, the synergy
benefits may not flow through soon enough.
Earnings and target price revision
 We are changing our estimates by 27%, 34% and 14% for CY11, CY12, and
CY13 respectively.
Price catalyst
 12-month price target: Rs129.00 based on a DCF methodology.
 Catalyst: Fall in cement prices and clarity on merger with ACC
Action and recommendation
 Maintain Underperform: Ambuja is currently one of the most expensive
stocks in our coverage trading at 19.3x and 16.5x PER CY11E and CY12E
earnings estimates, and we think it doesn’t reflect the volatile cement price
scenario and low-earnings growth.