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UBS Investment Research
Ambuja Cements Limited
Q2 CY11 conference call: key takeaways
„ Event: Expects demand to bounce back in a couple of years
The company thinks demand could remain muted this year with 5-6% YoY
growth, which could increase to 8-9% next year. Post that it thinks the industry
could return to double-digit demand growth. Demand and prices are expected to
remain weak in the monsoon period. Cement prices could have likely declined by
Rs5-10 per bag from June to July. Dispatch growth in the month of July was on the
back of a low base and not necessarily due to demand pick-up. The company
expects profitability in the second half of the year to be lower than the first half.
„ Impact: Would like to maintain market share
Ambuja commissioned 0.9mt Maratha plant in Q2CY11 and the 1.1mt Bhatapara
grinding unit in Jul-11. The company is planning a 2.2mt clinkerization unit in
Rajasthan, which is currently at the drawing board stage. It highlighted that it
would like to maintain its market share and frame capacity addition plans
accordingly. It thinks that small cement plants would be making losses and
valuations are likely to come closer to replacement costs for them. Large cement
companies, including Ambuja, would then be interested in making acquisitions.
„ Action: Costs have likely stabilized now
Imported coal costs are currently at US$120/t. The company thinks that costs have
about stabilized for now. Retail/housing accounts for 75-80% of Ambuja’s sales.
Replacement cost is anywhere between US$115-150/t.
„ Valuation: Sell rating with PT of Rs130
We value Ambuja at an EV/EBITDA multiple of 6.5x.
Key highlights from the conference call
Industry outlook: Demand growth could remain muted this year at 5-6%, but is
expected to increase by 8-9% next year with a double digit growth thereafter.
The company does not expect the weak demand environment to last for more
than a couple of years.
Acquisitions: Ambuja could participate in industry M&A if valuations come
closer to replacement costs. The company expects this to happen as smaller
plants will be making losses in its view.
Capacity expansion: 2.2 mtpa clinkerisation unit in Rajasthan is in planning
stage and capex is still under determination. Grinding unit for this is to be set up
in both Rajasthan and Dadri. The company highlighted that it would strive to
maintain market share and frame its expansion plans accordingly.
Replacement cost: The company thinks that replacement cost is anywhere
between US$115-150/t, depending on a number of variables. The cost of settingup a 1mt grinding unit is Rs2.5-3.5bn.
Capacity addition: Ambuja commissioned 0.9mt plant at Maratha
(Maharashtra) in Q2 CY11 and 1.1mt plant at Bhatapara in July 2011. With this,
the total grinding capacity stands at 27mtpa and clinker capacity at 16.9mtpa.
Ambuja is self-sufficient in clinker and did not procure any clinker in Q2.
Cement prices: Prices increased by ~Rs10 per bag in Q2 CY11 for Ambuja
with an average price of Rs205 per bag vs. Rs195 per bag in Q2CY10. Prices
are expected to correct in the monsoon period and correction is likely Rs5-10
per bag from June to July.
Cement volumes: In Ambuja’s three operating zones, demand in the
West/North regions increased by 2% and the Eastern region by 6% YoY in H1
CY11. July-11 volume growth was on the back of a low base and not necessarily
due to demand pick-up. Q3 volumes are expected to remain subdued due to the
monsoons. Region wise breakup of sales was- 40% in the West and North, and
20% in the East. Retail/housing accounts for 75-80% of its sales.
EBITDA margin: Cost increase of 12% YoY was higher than the realization
increase of 8%, resulting in lower EBITDA margins. Industry EBITDA/ton
could decline to Rs800-900/t levels.
Input Cost: 12% increase in costs due to higher fuel prices, raw material and
distribution costs. Distribution costs increased by 13%, led by freight cost
increase of 11% QoQ (due to inflation, tariff increase and load restrictions).
Gypsum/fly ash costs rose by 17%/14% YoY. Power generation costs increased
by 16%. O&M costs are expected to increase 15% this year.
Coal costs: Coal mix stood at: Imported coal-50%, linkage coal-45% and eauction-5%. Average coal cost was Rs1.1 per 1,000 kcal. Imported coal costs are
currently at US$120/t. Coal cost per kcal increased by 28% in Q2CY11 q/q.
Further negative surprises in fuel costs not expected as most of the increase in
costs have already been captured.
Capex: Ambuja plans to add windmills in order to rationalize the power & fuel
costs- currently in the drawing board stage. There have been efficiency gains in
Q2 due to capex that had been undertaken in the recent past. The company is
investing at its various plants to improve logistics infrastructure. No further
additions expected in captive power (current capacity of 250-275MW).
Captive coal block: Development is at a very initial stage currently and hence it
is difficult to indicate timelines.
Nepal mine: Acquired a limestone mine in Nepal for Rs200m. The mine is not
operational at present and this is a strategic investment for the future. The mine
has sufficient reserves to run a 1mt plant for 20 yrs.
Blending ratios: Blending ratio stands at: clinker -70%, Fly ash- 25% and
Gypsum – 5%.
Tax rate: Expected to be 30% for the full year.
Q Ambuja Cements Limited
Ambuja Cements has 26.5mt installed capacity and 75% of its total capacity is
in the western and northern regions of India. Controlled by the Holcim Group (a
46% stakeholder), it is one of the most efficient cement producers in the country.
Q Statement of Risk
We believe the principal risk to cement companies earning estimates arises from
fall in cement prices and rise in raw material prices.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Ambuja Cements Limited
Q2 CY11 conference call: key takeaways
„ Event: Expects demand to bounce back in a couple of years
The company thinks demand could remain muted this year with 5-6% YoY
growth, which could increase to 8-9% next year. Post that it thinks the industry
could return to double-digit demand growth. Demand and prices are expected to
remain weak in the monsoon period. Cement prices could have likely declined by
Rs5-10 per bag from June to July. Dispatch growth in the month of July was on the
back of a low base and not necessarily due to demand pick-up. The company
expects profitability in the second half of the year to be lower than the first half.
„ Impact: Would like to maintain market share
Ambuja commissioned 0.9mt Maratha plant in Q2CY11 and the 1.1mt Bhatapara
grinding unit in Jul-11. The company is planning a 2.2mt clinkerization unit in
Rajasthan, which is currently at the drawing board stage. It highlighted that it
would like to maintain its market share and frame capacity addition plans
accordingly. It thinks that small cement plants would be making losses and
valuations are likely to come closer to replacement costs for them. Large cement
companies, including Ambuja, would then be interested in making acquisitions.
„ Action: Costs have likely stabilized now
Imported coal costs are currently at US$120/t. The company thinks that costs have
about stabilized for now. Retail/housing accounts for 75-80% of Ambuja’s sales.
Replacement cost is anywhere between US$115-150/t.
„ Valuation: Sell rating with PT of Rs130
We value Ambuja at an EV/EBITDA multiple of 6.5x.
Key highlights from the conference call
Industry outlook: Demand growth could remain muted this year at 5-6%, but is
expected to increase by 8-9% next year with a double digit growth thereafter.
The company does not expect the weak demand environment to last for more
than a couple of years.
Acquisitions: Ambuja could participate in industry M&A if valuations come
closer to replacement costs. The company expects this to happen as smaller
plants will be making losses in its view.
Capacity expansion: 2.2 mtpa clinkerisation unit in Rajasthan is in planning
stage and capex is still under determination. Grinding unit for this is to be set up
in both Rajasthan and Dadri. The company highlighted that it would strive to
maintain market share and frame its expansion plans accordingly.
Replacement cost: The company thinks that replacement cost is anywhere
between US$115-150/t, depending on a number of variables. The cost of settingup a 1mt grinding unit is Rs2.5-3.5bn.
Capacity addition: Ambuja commissioned 0.9mt plant at Maratha
(Maharashtra) in Q2 CY11 and 1.1mt plant at Bhatapara in July 2011. With this,
the total grinding capacity stands at 27mtpa and clinker capacity at 16.9mtpa.
Ambuja is self-sufficient in clinker and did not procure any clinker in Q2.
Cement prices: Prices increased by ~Rs10 per bag in Q2 CY11 for Ambuja
with an average price of Rs205 per bag vs. Rs195 per bag in Q2CY10. Prices
are expected to correct in the monsoon period and correction is likely Rs5-10
per bag from June to July.
Cement volumes: In Ambuja’s three operating zones, demand in the
West/North regions increased by 2% and the Eastern region by 6% YoY in H1
CY11. July-11 volume growth was on the back of a low base and not necessarily
due to demand pick-up. Q3 volumes are expected to remain subdued due to the
monsoons. Region wise breakup of sales was- 40% in the West and North, and
20% in the East. Retail/housing accounts for 75-80% of its sales.
EBITDA margin: Cost increase of 12% YoY was higher than the realization
increase of 8%, resulting in lower EBITDA margins. Industry EBITDA/ton
could decline to Rs800-900/t levels.
Input Cost: 12% increase in costs due to higher fuel prices, raw material and
distribution costs. Distribution costs increased by 13%, led by freight cost
increase of 11% QoQ (due to inflation, tariff increase and load restrictions).
Gypsum/fly ash costs rose by 17%/14% YoY. Power generation costs increased
by 16%. O&M costs are expected to increase 15% this year.
Coal costs: Coal mix stood at: Imported coal-50%, linkage coal-45% and eauction-5%. Average coal cost was Rs1.1 per 1,000 kcal. Imported coal costs are
currently at US$120/t. Coal cost per kcal increased by 28% in Q2CY11 q/q.
Further negative surprises in fuel costs not expected as most of the increase in
costs have already been captured.
Capex: Ambuja plans to add windmills in order to rationalize the power & fuel
costs- currently in the drawing board stage. There have been efficiency gains in
Q2 due to capex that had been undertaken in the recent past. The company is
investing at its various plants to improve logistics infrastructure. No further
additions expected in captive power (current capacity of 250-275MW).
Captive coal block: Development is at a very initial stage currently and hence it
is difficult to indicate timelines.
Nepal mine: Acquired a limestone mine in Nepal for Rs200m. The mine is not
operational at present and this is a strategic investment for the future. The mine
has sufficient reserves to run a 1mt plant for 20 yrs.
Blending ratios: Blending ratio stands at: clinker -70%, Fly ash- 25% and
Gypsum – 5%.
Tax rate: Expected to be 30% for the full year.
Q Ambuja Cements Limited
Ambuja Cements has 26.5mt installed capacity and 75% of its total capacity is
in the western and northern regions of India. Controlled by the Holcim Group (a
46% stakeholder), it is one of the most efficient cement producers in the country.
Q Statement of Risk
We believe the principal risk to cement companies earning estimates arises from
fall in cement prices and rise in raw material prices.
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