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Ambuja Cements (ACEM)
Cement
Peak multiples rain on profitability parade. Ambuja Cement (ACEM) reported net
income of Rs4 bn contributed by a mammoth 70% sequential improvement in profitability at
Rs1,084/ton—marginally ahead of our estimates, as the impact of higher power and fuel costs
will likely accrue only by 2QCY11E. However, peak-trading multiples—10X on CY2011E EBITDA
and 8% downside to our revised target price of Rs145/share (Rs130/share previously)— compel
our SELL rating on ACEM.
No surprises—improved profitability aligned to expectation
ACEM reported revenues of Rs22.1 bn (10.9% yoy, 23.4% qoq), operating profit of Rs6.1 bn
(-1.8% yoy, 94.4% qoq) and net income of Rs4.1 bn (-9.8% yoy, 89.9% qoq) against our
estimate of Rs22.8 bn, Rs6 bn and Rs4 bn, respectively. Lower-than-estimated realizations were
offset by savings on raw material and power and fuel costs. A sharp 70% sequential jump in
profitability was primarily driven by leverage benefits from 14% qoq increase in volumes and 8%
qoq improvement in average realizations. We discuss in detail the key highlights of 1QCY11 results
in the subsequent section.
Improved pricing aids margin expansion, although fragile demand-supply remains a risk
ACEM’s profitability improved to Rs1,084/ton (70% qoq, -8% yoy) driven by an unprecedented
price hike of Rs40-50/bag across the country. Average cement prices in ACEM’s key market of
West were higher by Rs33/bag in February 2011 over 4QCY10. We, however, remain cautious on
the overall macro environment as rising input costs and sluggish demand growth could further
dent a fragile demand-supply environment. Besides the absence of volume growth (4.6% YTD for
the sector), 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.
Significant premium to peers, maintain SELL
We maintain our SELL rating on ACEM with a revised target price of Rs145/share (previously
Rs130/share) as we roll forward to CY2012E based valuations. ACEM is currently trading at 7.7X
CY2012E EBITDA and EV/ton of US$188/ton on CY2012E production as against a replacement
cost of US$110-120/ton. On capacity metrics, ACEM at US$188/ton (CY2012E production) trades
at a 47% premium to UTCEM and a 19% premium to ACC. Our target price of Rs145/share
implies EV/EBITDA of 6.9X and EV/ton of production of US$169/ton on CY2012E earnings and
production, respectively. We have revised our EPS estimates to Rs8.4/share in CY2011E (previously
Rs9.3/share) and Rs10.9/share in CY2012E (previously Rs11.6/share). We highlight earlier-thanestimated
weakening of cement prices remains a key downside risk to our estimates.
Key highlights of 1QCY11 results
Volumes – ACEM’s volumes during 1QCY10 improved to 5.6 mn tons (7% qoq and
14% yoy) driven seasonal pickup in demand.
Realizations – ACEM’s average realizations improved sharply by Rs292/ton sequentially
to Rs3,913/ton in 1QCY11 driven by a pan-India improvement in pricing environment.
We highlight that prices increased by ~Rs33/bag over 4QCY10 average in ACEM’s key
market of Western India.
Raw material cost – Raw material cost reduced to Rs228/ton in 1QCY11 from
Rs335/ton in 4QCY10. We highlight that higher raw material cost in 4QCY10 was
reflective of the transport strike at the company’s facilities in Himachal Pradesh which
could have increased the dependence on purchased clinker and was correspondingly
reflected in lower power and fuel cost.
Power and fuel cost – Power and fuel cost decreased sequentially to Rs854/ton (-5.4%
qoq, 27% yoy), though we expect the surge in prices of imported coal to likely result in
higher production cost over the next few quarters.
Freight cost –Freight cost increased to Rs902/ton (9% qoq, 15% yoy). We expect
further inflation in freight cost driven by likely hike in gasoline prices in the country
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Ambuja Cements (ACEM)
Cement
Peak multiples rain on profitability parade. Ambuja Cement (ACEM) reported net
income of Rs4 bn contributed by a mammoth 70% sequential improvement in profitability at
Rs1,084/ton—marginally ahead of our estimates, as the impact of higher power and fuel costs
will likely accrue only by 2QCY11E. However, peak-trading multiples—10X on CY2011E EBITDA
and 8% downside to our revised target price of Rs145/share (Rs130/share previously)— compel
our SELL rating on ACEM.
No surprises—improved profitability aligned to expectation
ACEM reported revenues of Rs22.1 bn (10.9% yoy, 23.4% qoq), operating profit of Rs6.1 bn
(-1.8% yoy, 94.4% qoq) and net income of Rs4.1 bn (-9.8% yoy, 89.9% qoq) against our
estimate of Rs22.8 bn, Rs6 bn and Rs4 bn, respectively. Lower-than-estimated realizations were
offset by savings on raw material and power and fuel costs. A sharp 70% sequential jump in
profitability was primarily driven by leverage benefits from 14% qoq increase in volumes and 8%
qoq improvement in average realizations. We discuss in detail the key highlights of 1QCY11 results
in the subsequent section.
Improved pricing aids margin expansion, although fragile demand-supply remains a risk
ACEM’s profitability improved to Rs1,084/ton (70% qoq, -8% yoy) driven by an unprecedented
price hike of Rs40-50/bag across the country. Average cement prices in ACEM’s key market of
West were higher by Rs33/bag in February 2011 over 4QCY10. We, however, remain cautious on
the overall macro environment as rising input costs and sluggish demand growth could further
dent a fragile demand-supply environment. Besides the absence of volume growth (4.6% YTD for
the sector), 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.
Significant premium to peers, maintain SELL
We maintain our SELL rating on ACEM with a revised target price of Rs145/share (previously
Rs130/share) as we roll forward to CY2012E based valuations. ACEM is currently trading at 7.7X
CY2012E EBITDA and EV/ton of US$188/ton on CY2012E production as against a replacement
cost of US$110-120/ton. On capacity metrics, ACEM at US$188/ton (CY2012E production) trades
at a 47% premium to UTCEM and a 19% premium to ACC. Our target price of Rs145/share
implies EV/EBITDA of 6.9X and EV/ton of production of US$169/ton on CY2012E earnings and
production, respectively. We have revised our EPS estimates to Rs8.4/share in CY2011E (previously
Rs9.3/share) and Rs10.9/share in CY2012E (previously Rs11.6/share). We highlight earlier-thanestimated
weakening of cement prices remains a key downside risk to our estimates.
Key highlights of 1QCY11 results
Volumes – ACEM’s volumes during 1QCY10 improved to 5.6 mn tons (7% qoq and
14% yoy) driven seasonal pickup in demand.
Realizations – ACEM’s average realizations improved sharply by Rs292/ton sequentially
to Rs3,913/ton in 1QCY11 driven by a pan-India improvement in pricing environment.
We highlight that prices increased by ~Rs33/bag over 4QCY10 average in ACEM’s key
market of Western India.
Raw material cost – Raw material cost reduced to Rs228/ton in 1QCY11 from
Rs335/ton in 4QCY10. We highlight that higher raw material cost in 4QCY10 was
reflective of the transport strike at the company’s facilities in Himachal Pradesh which
could have increased the dependence on purchased clinker and was correspondingly
reflected in lower power and fuel cost.
Power and fuel cost – Power and fuel cost decreased sequentially to Rs854/ton (-5.4%
qoq, 27% yoy), though we expect the surge in prices of imported coal to likely result in
higher production cost over the next few quarters.
Freight cost –Freight cost increased to Rs902/ton (9% qoq, 15% yoy). We expect
further inflation in freight cost driven by likely hike in gasoline prices in the country
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