Sell Ambuja Cements: 1QCY11 result - CLSA

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1QCY11 result
Ambuja’s 1Q reported earnings declined 12% YoY to Rs4bn, in-line with
our estimates (higher than consensus estimates of Rs3.3bn). Producer
discipline helped as realisations rose 10% QoQ and Ebitda margins rose
to Rs1,085/t, highest amongst cement majors. The stock has
outperformed the Sensex by 15ppt ytd and now trades at 11x EV/Ebitda
which appears expensive in the context of weak sector fundamentals
(rising costs, limited pricing power due to supply pressures); retain Sell.

1Q performance in-line with estimates
Ambuja’s 1Q Ebitda declined 2% YoY to Rs6.1bn, in-line with our estimates;
reported net earnings at Rs4bn (-12% YoY) was also in-line. Overall volumes
(5.6mt; +7% YoY) were in-line while net blended realisations (Rs196/bag;
+10% QoQ) were marginally better; overall costs too were slightly higher.
Ebitda margins rose sharply on a sequential basis though declined 8% YoY to
Rs1,085/t. Capitalisation of new plants resulted in a 38% YoY rise in
depreciation; tax rates at 27% were in-line.
Pricing discipline led to sharp rise in realisations
Despite weak demand-supply balance in the industry, Ambuja’s cement
realisations rose 11% QoQ, thanks to producer discipline across regions. We
however expect pricing discipline to weaken in the coming months due to
slowdown in construction activity with the onset of monsoon; rising capacity
surpluses would also impact. We therefore model in a ~5% decline over the
next three quarters from 1Q levels.
Despite pressures, Ambuja should enjoy highest margins
In addition to pricing pressures, cost inflation (particularly energy costs)
would be further margin headwind. We note that 1Q does not capture the full
impact of 30% hike in domestic linkage coal price (~30% mix) with effect
from Mar-11 which should be visible from 2Q onwards. On the whole, we
expect Ambuja’s Ebitda margins to decline 5% YoY in 2011, though note that
this would still be 10-15% higher than peers like ACC, Ambuja.
Maintain earning estimates; retain Sell
We maintain our EPS estimates for CY11-12; also introduce CY13 estimates.
We roll over our target multiples to Mar-13 and revise up target price to
Rs115/sh (from Rs110/sh). Current valuations at 11x EV/Ebitda, 20x PE are
expensive in the context of weak industry fundamentals; maintain Sell.