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Ambuja Cements (ACEM)
Cement
CY2011 also bereft of earnings growth. Ambuja Cement ended CY2011 with an
EPS of Rs7.8—the fourth consecutive year of no-growth; this despite the fact that
realizations grew an impressive 12% yoy and volumes 3% yoy. We note that despite
our judicious assumptions—Rs172/ton improvement in profitability and 8% volume
growth, ACEM trades at an EV/EBITDA of 9.5X on CY2012E, with risks to earnings from
lower-than-estimated volume growth and rising input costs. Maintain SELL with a
revised TP of Rs145/share (previously Rs135).
Operating profits miss estimates on higher input cost inflation
ACEM reported revenues of Rs23.3 bn (30% yoy, 29% qoq), operating profit of Rs4.2 bn (34%
yoy, 45% qoq) and adjusted net income of Rs2.6 bn (21% yoy, 51% qoq) against our estimate of
Rs22.4 bn, Rs4.7 bn and Rs3 bn, respectively. Higher-than-estimated cost inflation (especially
freight, overhead and employee expenses) led to EBITDA miss of 11% despite improved
realizations. Reported net income of Rs3 bn includes (1) Rs672 mn of prior-period tax credits and
(2) prior-period expenses of Rs243 mn on account of changes in the method of measurement of
ESOP compensation cost. We discuss key details of the result in a subsequent section.
Operating environment remains challenging, price increases notwithstanding
In our view, the current capacity overhang will likely continue into CY2012E as well with utilization
rates unlikely to inch over 75% even after factoring 8% consumption growth in CY2012E. We
note that the recent demand spurt could partly be explained by the impact of post-monsoon pentup
demand magnified by low base in November and December 2010 (-6% and -3% yoy growth,
respectively). We therefore continue to remain watchful of the demand environment and do not
construe this as a structural shift in the demand pattern yet. Earnings are also susceptible to cost
inflation driven by (1) impending diesel price hike and (2) shift in pricing structure by Coal India
(despite the partial rollback recently).
Stock price implying peak multiple on 25% improvement in profitability; SELL
We maintain SELL on ACEM with a revised target price of Rs145/share (previously Rs135). ACEM is
currently trading at 9.5X CY2012E EBITDA and EV/ton of US$227/ton on CY2012E production as
against a replacement cost of US$110-120/ton. We note that current market price implies 25%
yoy growth in profitability in CY2012E on a peak trading multiple of 9X CY2012E EBITDA (see
Exhibit 3) which in our view does not take cognizance of risk to earnings given the continued
demand-supply overhang. We note that our estimates factor sustenance of pricing discipline as
well as demand revival (to an extent) as we build 8% growth in both volumes and realizations and
a corresponding 19% improvement in profitability in CY2012E.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Ambuja Cements (ACEM)
Cement
CY2011 also bereft of earnings growth. Ambuja Cement ended CY2011 with an
EPS of Rs7.8—the fourth consecutive year of no-growth; this despite the fact that
realizations grew an impressive 12% yoy and volumes 3% yoy. We note that despite
our judicious assumptions—Rs172/ton improvement in profitability and 8% volume
growth, ACEM trades at an EV/EBITDA of 9.5X on CY2012E, with risks to earnings from
lower-than-estimated volume growth and rising input costs. Maintain SELL with a
revised TP of Rs145/share (previously Rs135).
Operating profits miss estimates on higher input cost inflation
ACEM reported revenues of Rs23.3 bn (30% yoy, 29% qoq), operating profit of Rs4.2 bn (34%
yoy, 45% qoq) and adjusted net income of Rs2.6 bn (21% yoy, 51% qoq) against our estimate of
Rs22.4 bn, Rs4.7 bn and Rs3 bn, respectively. Higher-than-estimated cost inflation (especially
freight, overhead and employee expenses) led to EBITDA miss of 11% despite improved
realizations. Reported net income of Rs3 bn includes (1) Rs672 mn of prior-period tax credits and
(2) prior-period expenses of Rs243 mn on account of changes in the method of measurement of
ESOP compensation cost. We discuss key details of the result in a subsequent section.
Operating environment remains challenging, price increases notwithstanding
In our view, the current capacity overhang will likely continue into CY2012E as well with utilization
rates unlikely to inch over 75% even after factoring 8% consumption growth in CY2012E. We
note that the recent demand spurt could partly be explained by the impact of post-monsoon pentup
demand magnified by low base in November and December 2010 (-6% and -3% yoy growth,
respectively). We therefore continue to remain watchful of the demand environment and do not
construe this as a structural shift in the demand pattern yet. Earnings are also susceptible to cost
inflation driven by (1) impending diesel price hike and (2) shift in pricing structure by Coal India
(despite the partial rollback recently).
Stock price implying peak multiple on 25% improvement in profitability; SELL
We maintain SELL on ACEM with a revised target price of Rs145/share (previously Rs135). ACEM is
currently trading at 9.5X CY2012E EBITDA and EV/ton of US$227/ton on CY2012E production as
against a replacement cost of US$110-120/ton. We note that current market price implies 25%
yoy growth in profitability in CY2012E on a peak trading multiple of 9X CY2012E EBITDA (see
Exhibit 3) which in our view does not take cognizance of risk to earnings given the continued
demand-supply overhang. We note that our estimates factor sustenance of pricing discipline as
well as demand revival (to an extent) as we build 8% growth in both volumes and realizations and
a corresponding 19% improvement in profitability in CY2012E.
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