Ambuja Cements:: Centrum

Steep fall in realization leads to OPM disappointment
We retain Sell rating on Ambuja with a revised price target of Rs149 (earlier:
Rs156) considering a) significant disappointment in current quarters’ results with
OPM at decade low levels b) downward revision of 9.4%/12% in CY13E/CY14E EPS
estimates, c) expensive valuations and d) expected dilution of 28% and cash outgo
of Rs35bn if restructuring deal proposed with ACC goes through. The result was a
significant disappointment with the company reporting EBITDA of Rs2.6bn (vs. est.
Rs3.5bn) and OPM at 12.7% (vs. est. 17.5%) primarily due to steep 6% QoQ fall in
realization contrary to ACC and UltraTech which posted realization drop of 1-2%
QoQ. EBITDA/tonne declined 52.4% YoY to Rs522 during the quarter and OPM was
at decade low levels. Though, earnings are expected to improve going forward, we
maintain Sell rating considering expensive valuations (12.6x CY14E EV/EBITDA).

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 Sharp decline in realization leads to fall in earnings: Led by a steep 11.1% YoY
(and 6% QoQ) fall in realization, revenue declined 7.5% YoY to Rs20bn. Sales volume
improved 4% YoY to 4.89mt, contrary to our expectation of a decline of 1.8% YoY.
Led by steep decline in realization, the company reported a decline of 50.4% YoY in
operating profit to Rs2.6bn and 50.9% YoY in adjusted profit to Rs1.5bn.
 OPM contracts sharply led by realization decline: OPM declined 11pp YoY to
12.7% largely due to steep decline in realization. We believe that realization decline
was mainly due to lower cement price in Gujarat during the quarter. Operating cost
increased 1.7% YoY driven by 8.6% YoY increase in employee cost/tonne. Energy
cost declined 21.9% YoY to Rs934/tone and raw material cost was down 7.4% YoY to
Rs293/tonne. EBITDA/tonne declined Rs574/tonne YoY and Rs393/tonne QoQ to
Rs522/tonne.
 Earnings estimate revised downwards: We have revised realization assumptions
downwards by 1.7%/2.5% for CY13E/CY14E considering the steep fall in realization
during the quarter. Factoring in the change in realization, EPS estimates stand
revised downwards by 9.7%/12.2% for CY13E/CY14E.
 Valuation and risks: At the CMP, the stock trades at 21.9x CY14E EPS, 12.6x
EV/EBITDA, and EV/tonne of US$174.7. We have assigned a multiple of 8x EBITDA for
Ambuja and Rs41/share (assigning 30% holding company discount on our target
price of Rs1,242) for its holding in ACC, if the proposed restructuring goes through.
We maintain Sell rating on the stock with a potential downside of 24.4%. The key
upside risk to our thesis could be a) better-than-estimated realization and b)
regulatory objection leading to non-approval of the proposed restructuring deal.