Ambuja Cements (4QCY14) : Underinvestment to hurt. Maintain SELL :HDFC Sec

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Underinvestment to hurt Ambuja Cements reported weak numbers (EBITDA/t at Rs 605/t vs est. Rs 701/t). Realisations drove the underperformance due to very weak pricing in North (Rs 4,321/t, 3.4% YoY, -5.1% QoQ). Volume growth returned after a tepid 3Q (5.5 mT, 5.1% YoY), however CY14 volumes grew mere 2.5%. Despite geographical advantages (no South in the region mix), Ambuja cement will be hamstrung when cement industry regains volume traction. This is due to an already constrained clinker capacity. Further, visibility on investments in upgrading clinker capacity remains weak and this will be detrimental especially in key markets of North and West. Valuations at 13.7/10.8 CY15/16E EV/EBITDA and US$215 remain challenging despite being lower than both UltraTech and Shree Cement, which offer more visible growth opportunities. We remain cautious on Ambuja and maintain a SELL with a TP of Rs 215 (9.0/8.5x FY16E EV/EBITDA for Ambuja/ACC, 20% holdco discount for ACC stake).  4QCY14 highlights: Employee costs appeared high, likely due to year end accounting adjustments (40% YoY). ACEM managed to report flat operating costs (QoQ) as higher employee costs was offset by lower freight and raw materials cost. Adjusted for writebacks of tax, the profit for the period was Rs 2.4bn (7.2% YoY, flat QoQ).  Outlook and view: Cement companies continue to struggle to implement price hikes in regions other than South, driven by higher supplies. As such, prompt improvement in EBITDA/t may not be forthcoming. Our earnings estimates factor in a 33% EBITDA/30% PAT CAGR over FY14-16. However, we find the valuations factoring in all positives and overlooking some of the structural shortcomings of the company, clinker shortage and lack of expansion plan being the foremost. Under investment is eroding the long term profitability of the company as it loses dominant presence in its key markets.

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http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3011512