Sell Ambuja Cements: 2QCY11 results-- CLSA

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2QCY11 results
Ambuja’s 2Q Ebitda declined 3% YoY to Rs5.9bn, 7% ahead of estimates
led by better realisations. Higher tax rates however impacted net
earnings which declined 11% YoY and came-in 5% below estimates at
Rs3.5bn. Higher sequential realisations however were offset by higher
costs as a result of which, Ebitda margins remained flat QoQ at
Rs1,100/t. The recent corrections in prices would however impact
margins from 3Q and pressures would continue in the medium term. The
stock has underperformed the markets by 9ppt in the last three months
which should continue give the weak industry fundamentals; retain SELL.
2Q operating performance better, net earnings lower
Ambuja’s 2Q Ebitda declined 3% YoY to Rs5.8bn, 7% ahead of our estimates;
net earnings at Rs3.5bn (-11% YoY) was 5% lower due to higher tax rates.
Overall volumes (5.3mt; -2% YoY) were in-line while net blended realisations
(Rs205/bag; +5% QoQ) were better than our estimates. Overall costs were
broadly in-line and unit costs rose 6% QoQ. Ebitda margins stayed almost flat
YoY/QoQ at Rs1,100/t. Interest (+88% YoY), other income (+8%) were
broadly in-line while tax rate rose to 34.7% (+470bps YoY).
Pricing discipline led to sharp rise in realisations
Despite weak industry demand-supply balance, Ambuja’s realisations rose 5%
QoQ, thanks to producer discipline (mainly in west, in our view). We however
note that prices corrected 3-20% across regions in the last few weeks due to
slowdown in construction activity with the onset of monsoon; rising capacity
surpluses would also continue to impact. We therefore expect 2HCY11
realisations to average ~10% lower than 1H.
Margins would come down in the next two quarters
Ambuja’s unit production costs rose 6% QoQ (+13% YoY). The quarter also
captures the impact of rise in linkage coal prices (~30% linkage mix) as
power & fuel costs rose ~9% QoQ. With costs likely to stay firm and lower
realisations, we expect Ebitda margins to average 35-40% lower in the
2HCY11 from 2Q levels. Management is cautious in its outlook for coming
quarters due to pricing pressures and weak demand trend.
Maintain earning estimates; retain Sell
Ambuja has underperformed the markets by 9ppt in the last three months
which should continue give the weak industry fundamentals. We retain our
cautious sector view and expect margin pressures to continue in the medium
term. Valuations at 9x 1-year forward EV/Ebitda, 17x PE are rich in this
context; maintain Sell (target: Rs115/sh).