Ambuja Cements -but expect decline:: Macquarie Research,

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Ambuja Cements
Good but expect decline
Event
 2QCY11 results marginally below estimates: ACEM reported 2QCY12
results that were 4% lower than our estimates due to higher than expected
costs. Profits look to have peaked out, and the company’s indecision over
increasing capacity implies slower growth in future. Maintain Underperform.
Impact
 2QCY11 – peak results: ACEM reported net sales of Rs21.7bn, up 6% YoY,
driven by a 7% increase in realisation. EBITDA at Rs5.83bn was down 3%
YoY as costs increased 10% driven by higher energy and staff costs. EBITDA
per tonne was Rs1,101 for Q2, as compared to Rs1,084 last quarter and
Rs1,130 last year. Net profit was down 11% at Rs3.47bn. We think
management wanted to depress the numbers given the government scrutiny
of cartelisation, and provided 35% tax.
 CY11 numbers on track: In the first half, ACEM achieved 50% of our
shipment estimates, 57% of our EBITDA and 63% of our full-year EPS
estimate. However, we expect cement prices to decline as the impact of
oversupply worsens in the upcoming slack season, and are forecasting
EBITDA/t of Rs970 for the full year.
 Cement prices have started cracking: Cement prices in eastern, central
and parts of western India have declined by Rs40/bag or almost 15% since
the peak in May. Northern India has seen Rs15/bag or around a 5% decline.
Southern India has held on as off now. Demand remains very weak and is
unlikely to improve in the near term.
 No major expansion plans: Ambuja is already operating at 85% capacity
utilisation and needs to announce some expansion in the near term or growth
will start suffering from CY13.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs110.00 based on a DCF methodology.
 Catalyst: Decline in cement prices.
Action and recommendation
 Maintain Underperform: We believe that its premium to its peers in terms of
valuation will disappear as advantages such as fiscal incentives and port
access are reduced. Also, the share price will not see any support from further
buybacks by Holcim. Ambuja is currently one of the most expensive stocks in
our India materials coverage, trading at 17x and 15x our CY11 and CY12
earnings estimates, respectively. We think this does not reflect the volatile
cement price scenario and expected low earnings growth.