Ambuja Cements--Earnings disappoint on weak realizations. SELL says Kotak Sec,

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Ambuja Cements (SELL)
Cement
Earnings disappoint on weak realizations. ACEM reported disappointing earnings results
(1) with sequential drop in realizations and (2) anticipated benefit of lower raw material cost
offset by higher power and fuel cost. We re-iterate our SELL rating, as the current market price
of Rs142/share offers 24% downside to our target price of Rs108/share. ACEM is trading at
US$194/ton on CY2011E production and EV/EBITDA of 7.9X on CY2011E EBITDA.



Margins take a hit on account of lower realizations and higher fuel cost
ACEM reported revenues of Rs15.6 bn (-2.9% yoy, -23.6% qoq), operating profit of Rs2.8 bn
(-34% yoy, -53% qoq) and net income of Rs1.5 bn (-52% yoy, -61% qoq) against our estimate of
Rs16 bn, Rs3.5 bn and Rs2.3 bn respectively. Improved volumes (+4.8% yoy) could only partially
offset weaker realizations at Rs3,514/ton (-7.3% yoy, -8.4% qoq) which were lower than our
estimate of Rs3,664/ton.
A sharp increase in power and fuel cost from Rs849/ton in 2QCY10 to Rs994/ton in 3QCY10 led
to further contraction of EBITDA margins from 29.5% in 2QCY10 to 18.1% in 3QCY10. Increase
in power and fuel cost can be attributed to (1) an increase in the prices of imported coal, and
(2) higher manufacture of clinker which increases the requirement of power and fuel. Overall
profitability declined to Rs636/ton from Rs1,130/ton in 2QCY10.
Limited impact of recent price hike, benefits likely to accrue in 4QCY10
We highlight that price hikes in West by Rs10-15/bag (mid September) had a limited impact on
ACEM’s average realization as (1) they were taken during the end of the quarter and (2) they were
taken on the back of equivalent or higher price correction during the earlier months of July and
August. Average cement prices in West were down from Rs232/bag in May 2010 to Rs217/bag in
September 2010. ACEM continues to maintain stable volumes growth with YTD (FY2011) volumes
growing at 6.7% yoy against the industry growth of 5%.
Expensive valuations, maintain SELL with a TP of Rs108/share
We maintain our SELL on ACEM with a target price of Rs108/share based on CY2011E valuations.
ACEM is currently trading at 7.9X CY2011E EBITDA and EV/ton of US$194/ton on CY2011E
production as against a replacement cost of US$110-120/ton. Our target price of Rs108/share
implies EV/EBITDA of 5.8X and EV/ton of production of US$142/ton on CY2010E earnings and
production, respectively.