Lower realization impacts profit; downgrade to Neutral Ambuja Cements :: Centrum

Lower realization impacts profit; downgrade to Neutral
Ambuja Cements’ Q1CY13 result was below estimates primarily due to lower than estimated realization (Rs4,388/tonne vs. est. Rs4,591/tonne). The company reported revenue of Rs25.4bn (est. Rs27.1bn), adjusted EBITDA (adjusted for Rs291mn of CENVAT credit for earlier years) of Rs5.1bn (est. Rs6.1bn) and adjusted OPM of 20.1% (est. 22.7%). Lower-than-expected operating profit resulted in adjusted profit of Rs3.3bn (est. Rs3.9bn) though depreciation at Rs1.2bn was lower than estimated Rs1.bn). Going forward, we expect recovery in cement demand led by electoral spending (general elections are expected in May 2014), improvement in capex activities of industries and higher demand from the housing segment (as we expect a decline in interest rate). Improvement in cement demand will aid pricing power of manufacturers who will be able to pass on the rise in input cost to consumers. Cement price has remained subdued for the past 3-4 months due to sluggish demand across India. Though, we expect recovery in OPM and profitability post Q2CY13E, lower realization during the quarter leads us to downgrade our EPS estimates downwards by 8.5% to Rs10.1 for CY13E. We expect recovery in cement price during Q3 and Q4 and hence CY14E EPS stands intact at Rs13.6. We downgrade our rating on the stock to Neutral from Buy with a revised price target of Rs207 (earlier: Rs222) based on 8.5xCY14E EBITDA.
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Lower sales volume and higher costs lead to lower op. profit: Lower cement sales volume of 5.8mt (4.1% YoY decline) offset increase of 0.8% YoY in realization and led to revenue decline of 3.4% YoY to Rs25.4bn. Led by lower sales volume and higher operating costs, adjusted EBITDA (adj. for Rs291mn CENVAT credit related to earlier years) declined 31.2% YoY to Rs5.1bn.

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Op. cost/tonne increases 12.3% YoY and impacts margin: Operating costs/tonne increased 12.3% YoY led by an increase in employee cost by 22.3% YoY, freight cost by 11.8% YoY and other expense by 19.6% YoY. Energy cost declined 4.5% YoY to Rs990/tonne. Lower sales volume and higher operating costs led to 8.2pp contraction in OPM to 20.1%. EBITDA/tonne during the quarter was at Rs883 against Rs1,231 in Q1CY12.
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Earnings estimate for CY13E revised downwards: We have revised realization assumption for CY13E to Rs4,620/tonne against Rs4,786/tonne earlier to factor in lower cement price during the quarter, which leads to 11.6% downwards revision in op. profit for the year. However, considering lower depreciation and higher other income, our EPS is being revised downwards only by 8.5% to Rs10.1 for CY13E. Our EPS for CY14E is intact at Rs13.6.
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Downgrade to Neutral: At the CMP, the stock trades at 13.8x CY14E EPS, 7.7x EV/EBITDA, and EV/tonne of US$158. We value the stock at 8.5x CY14E EBITDA and arrive at a price target of Rs207 (earlier: Rs222), which gives an upside of 9.2% from current levels. We downgrade our rating on the stock to Neutral (earlier: Buy).