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Ambuja Cements (ACEM)
Cement
8X EV/EBITDA—earnings risk may supersede control premium. Despite the
correction in the stock over the past week, we continue to maintain our SELL rating on
Ambuja Cements (ACEM) as current trading multiples (8.3X EV/EBITDA) do not take
cognizance of earning pitfalls from a bleak demand environment (2.8% YTD). ACEM’s
stock performance over the past few years has been driven by multiple expansion
(8-15X) likely influenced by control premium paid by its promoter (Holcim), which may
be less inclined to increase ownership in the current turbulent times with key leverage
ratios precariously near targets.
8X EV/EBITDA and 15X P/E—peak multiples not factoring earnings risk
ACEM is currently trading at 8.3X one-year rolling forward EBITDA (long-term range of 6-9X) and
15.5X one-year rolling forward EPS—despite a weak demand environment that could put to test
the pricing discipline in the face of continued demand-supply imbalance. CMP implies 31% yoy
growth in profitability in CY2012E (assuming a mid-cycle multiple of 7X) compared to 13%
growth factored by us and a meek 3% growth in CY2011E. On a capacity metrics, ACEM at
US$155/ton (CY2012E capacity) is trading at 28% premium to UTCEM and 18% premium to
ACC.
Modest demand growth (2.8% YTD) could test the ’pricing discipline’
At the CMP, the market continues to put money on a sustained pricing discipline without paying
heed to a sedate 2.8% YTD growth in cement consumption, which could prolong a recovery of
utilization rates which have plummeted to a decade low of 71% in 1HFY12. We note that despite
the sharp price increases taken in February, ACEM has not been able to improve its overall
profitability in 1HFY12, and the recent price increases (Rs10-15/bag) will only compensate for the
price decline in the monsoon season. Exhibit 1 highlights the demand-supply scenario of the
industry while Exhibit 2 charts the monthly dispatch growth in FY2012E.
Holcim may be less inclined to increase ownership
Holcim (ACEM’s promoter) has increased its ownership in ACEM to ~50%, and hence may be less
inclined to further increase its stake, especially in the current scenario wherein key leverage ratios
for the group have slipped below targets (see Exhibit 2). Despite no growth in earnings over the
past three years (Rs8/share EPS), the ACEM stock has near-doubled with a re-rating of multiples
from 9X to 18X. This can be partly attributed to the rich controlling premium paid by the Holcim
group to increase its ownership from 26.4% to 27.9% during this period
Earnings factor judicious improvement, in stark contrast to recent past
We factor improvement in ACEM’s profitability by 13% in CY2012E along with volume
growth of 8% yielding a 25% growth in earnings—despite a more sedate 3% growth in
earnings reported over the past three years. We note that despite a favorable shift in raw
material costs and a 15% improvement in realizations, ACEM has not been able to improve
its profitability signaling continued brunt of inflating fuel and freight cost. Exhibit 5 details
the key operating metrics and earnings growth in ACEM over the past few years.
Moderation in international coal prices could be offset by depreciating currency
ACEM, with its plants in costal areas, has relatively higher dependence on imported coal
(~40%). We note that although prices of imported coal have shown some signs of
moderation recently (see Exhibit 6), impact on power and fuel cost will be potentially offset
(or could be even worse off) due to currency depreciation. Further, potential upward revision
in diesel prices could worsen the freight cost.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Ambuja Cements (ACEM)
Cement
8X EV/EBITDA—earnings risk may supersede control premium. Despite the
correction in the stock over the past week, we continue to maintain our SELL rating on
Ambuja Cements (ACEM) as current trading multiples (8.3X EV/EBITDA) do not take
cognizance of earning pitfalls from a bleak demand environment (2.8% YTD). ACEM’s
stock performance over the past few years has been driven by multiple expansion
(8-15X) likely influenced by control premium paid by its promoter (Holcim), which may
be less inclined to increase ownership in the current turbulent times with key leverage
ratios precariously near targets.
8X EV/EBITDA and 15X P/E—peak multiples not factoring earnings risk
ACEM is currently trading at 8.3X one-year rolling forward EBITDA (long-term range of 6-9X) and
15.5X one-year rolling forward EPS—despite a weak demand environment that could put to test
the pricing discipline in the face of continued demand-supply imbalance. CMP implies 31% yoy
growth in profitability in CY2012E (assuming a mid-cycle multiple of 7X) compared to 13%
growth factored by us and a meek 3% growth in CY2011E. On a capacity metrics, ACEM at
US$155/ton (CY2012E capacity) is trading at 28% premium to UTCEM and 18% premium to
ACC.
Modest demand growth (2.8% YTD) could test the ’pricing discipline’
At the CMP, the market continues to put money on a sustained pricing discipline without paying
heed to a sedate 2.8% YTD growth in cement consumption, which could prolong a recovery of
utilization rates which have plummeted to a decade low of 71% in 1HFY12. We note that despite
the sharp price increases taken in February, ACEM has not been able to improve its overall
profitability in 1HFY12, and the recent price increases (Rs10-15/bag) will only compensate for the
price decline in the monsoon season. Exhibit 1 highlights the demand-supply scenario of the
industry while Exhibit 2 charts the monthly dispatch growth in FY2012E.
Holcim may be less inclined to increase ownership
Holcim (ACEM’s promoter) has increased its ownership in ACEM to ~50%, and hence may be less
inclined to further increase its stake, especially in the current scenario wherein key leverage ratios
for the group have slipped below targets (see Exhibit 2). Despite no growth in earnings over the
past three years (Rs8/share EPS), the ACEM stock has near-doubled with a re-rating of multiples
from 9X to 18X. This can be partly attributed to the rich controlling premium paid by the Holcim
group to increase its ownership from 26.4% to 27.9% during this period
Earnings factor judicious improvement, in stark contrast to recent past
We factor improvement in ACEM’s profitability by 13% in CY2012E along with volume
growth of 8% yielding a 25% growth in earnings—despite a more sedate 3% growth in
earnings reported over the past three years. We note that despite a favorable shift in raw
material costs and a 15% improvement in realizations, ACEM has not been able to improve
its profitability signaling continued brunt of inflating fuel and freight cost. Exhibit 5 details
the key operating metrics and earnings growth in ACEM over the past few years.
Moderation in international coal prices could be offset by depreciating currency
ACEM, with its plants in costal areas, has relatively higher dependence on imported coal
(~40%). We note that although prices of imported coal have shown some signs of
moderation recently (see Exhibit 6), impact on power and fuel cost will be potentially offset
(or could be even worse off) due to currency depreciation. Further, potential upward revision
in diesel prices could worsen the freight cost.
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