Ambuja Cements - Q2CY13 result update - Centrum

Result a non-event; restructuring intent dubious
Ambuja Cements’ Q2CY13 result was marginally above our estimates with
operating profit at Rs4.9bn (vs. est. Rs4.8bn, Bloomberg consensus est. Rs5.3bn)
and operating margin at 21% (vs. est. 19.8%). Higher operating profit was led by
lower opex of Rs3,446/tonne (vs. est. Rs3,540/tonne). Sales volume during the
quarter was at 5.4mt (vs. est. 5.5mt) and realization/tonne was at Rs4,360 (vs. est.
Rs4,432). Higher operating profit and lower tax rate (29.2% vs. est. 32%) resulted
in higher than estimated profit of Rs3.2bn (vs. est. Rs3bn). The company has
announced the acquisition of Holcim’s 50.3% stake in ACC through cash and
allocation of shares to Holcim. We believe this acquisition will not benefit
Ambuja shareholders in the near-term and expect a de-rating in the company’s
valuation multiple. Also, the near-term growth outlook for cement demand
remains bleak as is evident from lower despatches growth during May and June
’13. We have revised our earnings estimates for the company by 9.8%/12.5% for
CY13E and CY14E considering lower volume and pressure on realization
(realization has been declining in the last three quarters). Though we are
hopeful of a recovery in cement demand in 2HFY14E, the current development
in the company leads us to downgrade the stock from Neutral to Sell (due to
the cash outgo of Rs35bn and potential dilution of 28% post completion of this
deal). We have assigned a multiple of 8x EBITDA (earlier 8.5x) for Ambuja and
Rs40/share (assigning 40% holding company discount on our target price of
Rs1,389) for its holding in ACC post-acquisition. We downgrade our rating on
the stock to Sell from Neutral with a revised price target of Rs156 (earlier: Rs207).
 Lower sales volume and realization impact revenue and operating profit:
Led by a decline of 2.9% YoY in sales volume and 5.9% YoY in realization, the
company reported 8.6% YoY decline in revenue to Rs23.5bn. Operating profit
was down 31.9% YoY to Rs4.9bn primarily due to the decline in sales volume
and realization.

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 Lower realization, sales volume and higher opex impact OPM: Led by lower
realization and sales volume and higher opex (up 3.5% YoY), OPM declined
7.2pp YoY to 21%. Higher operating cost was led by an increase in employee
cost by 9.8% YoY, freight cost by 10.6% YoY and other expenses by 10.6% YoY.
Energy cost declined 4.4% YoY to Rs1,033/tonne. EBITDA/tonne during the
quarter was at Rs915 against Rs1,304 in Q2CY12 and Rs883 in Q1CY13.
 Earnings estimate revised downwards: We have revised sales volume
assumption downwards by 4.1%/2.9% for CY13E/CY14E. We have also revised
realization assumption downwards by 1.3%/2,4% for CY13E/CY14E to factor in
lower cement price during the quarter. Led by downward revision in realization
and volume estimates, EPS stands revised downwards by 9.8%/12.5% to
Rs9.1/Rs11.9 for CY13E/CY14E.
 Downgrade to Sell: At the CMP, the stock trades at 16x CY14E EPS, 8.8x
EV/EBITDA, and EV/tonne of US$159.5. We have assigned a multiple of 8x
EBITDA (earlier 8.5x) for Ambuja and Rs40/share (assigning 40% holding
company discount on our target price of Rs1,389) for its holding in ACC
post-acquisition. We downgrade the stock from Neutral to Sell (due to cash
outgo of Rs35bn and potential dilution of 28% post the completion of the
announced deal) with price target of Rs156.