Ambuja Cements; Northern Price Pressure Likely - Citi

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Ambuja Cements (ABUJ.BO)
Relatively Expensive; Northern Price Pressure Likely
 TP hiked to Rs108, maintain Sell — We raise our TP to Rs108 (from Rs71)
based on Dec-11E EV/tonne of US$120 (vs. Sep-10E earlier). Replacement
cost is our key valuation tool but has moved up to US$120/t (from US$100/t)
to reflect current capex trends. We now value Ambuja in line with
replacement costs (vs. a 15% discount earlier). At our revised TP, Ambuja
trades at an EV/EBITDA of 7.7x and a P/E of 15.6x. Maintain Sell on
relatively expensive valuations, expected price correction due to massive
capacity creation, and cost pressures.
 Revising estimates — We raise our PAT estimate by 15-28% for CY10-11.
Ambuja’s volumes have come in lower than expectations YTD and we cut
CY10-11E sales volumes by 3-4%. However, average selling prices have
been firmer than anticipated and we now expect average prices to be 8-11%
higher than our previous estimates. We expect average prices to fall 1% YoY
in CY10 (vs. -10% prev.) and fall 6% in CY11 (vs. -3% prev.).
 3QCY10: PAT falls 52% YoY — 3Q PAT was Rs1.5bn, 52% lower YoY and
below our forecast of Rs1.9bn. Ambuja gained due to higher volumes (+6%
to 4.35m tonnes) and lower raw material costs (no clinker purchases), but
was hit by lower selling prices (-8% YoY) and higher per tonne power/fuel
costs (+30% YoY) as cost of imported and non-linkage coal rose during 3Q.
EBITDA/t in 3Q was Rs651, down 38% YoY, and 42% lower sequentially.
EBITDA margins were 18.1% vs. 26.7% last year and 30-31% in 1H.
 Update on expansion plans — Ambuja’s capacity has been raised from
22mtpa as of end-CY09 to 25mtpa currently. This is expected to rise to
27mtpa by end-CY10. Clinker capacity of 2.2mtpa each has been set up in
HP and Chhattisgarh, along with associated grinding capacity in UP and HP.
Additional cement capacity is being set up in Chhattisgarh and Maharashtra.
Ambuja has around 400MW of captive power and sells some excess power.
 Stock is relatively expensive — Cement prices fell sharply during April-
August, but have recovered most of the lost ground since then with volumes
reportedly cut to help hike prices. Prices have been hiked by 4% in North
India (40% of Ambuja’s sales) and are likely to remain firm in 3QFY11 but
are likely to correct next quarter. On this basis, Ambuja looks relatively
expensive at an EV/t of US$163/t.
 Upside risks — (1) Continued price strength; (2) Delays in capacity; (3)
Higher-than-expected demand growth; and (4) Lower duties/taxes.