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No Saving From Rising Costs
Volume growth for Ambuja will be marginally ahead of the industry in
CY11 but lower than that of ACC. Whilst absence from South India
insulates it from the declining volume market, it is facing heightened
competition in its large Western market as Southern manufacturers
are entering this region to keep their mills grinding. This plus sharp
rise in unitary power and fuel and freight costs will lead to a drop in
EBITDA/tonne by 12% of Rs110/tonne in CY11.
Competitive position: MODERATE. Change to this position: STABLE.
Ambuja’s balance sheet strength is well appreciated but its relatively weaker
competitive positioning compared with ACC and UltraTech across multiple
factors in our competitive mapping keep it behind the pan-India players.
However, it is significantly ahead of all other Indian cement manufacturers
(barring ACC and UltraTech).
Operating costs to rise in line with 1HCY11: After posting 12% YoY
increase in operating costs in 1HCY11, we expect that unitary costs will rise by
14% YoY in 2HCY11 as power and fuel and freight costs rise 2%-5%
sequentially for the rest of CY11. Whilst realisations will be up 7% YoY for
CY11, we expect the 21% YoY EBITDA/tonne decline in 2HCY11 to pull net
earnings lower by 17%. We expect further sequential rise in operating costs in
CY12 (3%) which could lead to a marginal (4%) increase in EBITDA/tonne.
Lower demand and capacity utilisation will keep pricing growth muted (4%) for
Ambuja.
Volume growth marginally ahead of industry: We expect 4% volume
growth in CY11, implying 7% growth in 2HCY11. We expect this volume
growth because of Ambuja’s incremental capacities and seasonally a better
period in 4QCY11. Lastly, some regions of operations for Ambuja
(Central/East) are growing at 10%-12%, which is significantly ahead of the
industry growth (0%-1%).
Valuation: Ambuja is presently trading at 8.9x 1-year forward EV/EBITDA on
our EBITDA estimates (15% lower than consensus). Whilst on EV/tonne, the
stock is trading at a 4% discount to its last 4-5 year average (US$145/tonne);
on 1-year forward EV/EBITDA, the stock is trading at 14% premium. We expect
valuations to correct as EBITDA/tonne continues to decline for CY11 and
profitability reduces materially; we expect RoIC in CY12 and CY13 to decline
to 20% from 31% in CY10. Demand recovery and pricing discipline are the key
risks.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
No Saving From Rising Costs
Volume growth for Ambuja will be marginally ahead of the industry in
CY11 but lower than that of ACC. Whilst absence from South India
insulates it from the declining volume market, it is facing heightened
competition in its large Western market as Southern manufacturers
are entering this region to keep their mills grinding. This plus sharp
rise in unitary power and fuel and freight costs will lead to a drop in
EBITDA/tonne by 12% of Rs110/tonne in CY11.
Competitive position: MODERATE. Change to this position: STABLE.
Ambuja’s balance sheet strength is well appreciated but its relatively weaker
competitive positioning compared with ACC and UltraTech across multiple
factors in our competitive mapping keep it behind the pan-India players.
However, it is significantly ahead of all other Indian cement manufacturers
(barring ACC and UltraTech).
Operating costs to rise in line with 1HCY11: After posting 12% YoY
increase in operating costs in 1HCY11, we expect that unitary costs will rise by
14% YoY in 2HCY11 as power and fuel and freight costs rise 2%-5%
sequentially for the rest of CY11. Whilst realisations will be up 7% YoY for
CY11, we expect the 21% YoY EBITDA/tonne decline in 2HCY11 to pull net
earnings lower by 17%. We expect further sequential rise in operating costs in
CY12 (3%) which could lead to a marginal (4%) increase in EBITDA/tonne.
Lower demand and capacity utilisation will keep pricing growth muted (4%) for
Ambuja.
Volume growth marginally ahead of industry: We expect 4% volume
growth in CY11, implying 7% growth in 2HCY11. We expect this volume
growth because of Ambuja’s incremental capacities and seasonally a better
period in 4QCY11. Lastly, some regions of operations for Ambuja
(Central/East) are growing at 10%-12%, which is significantly ahead of the
industry growth (0%-1%).
Valuation: Ambuja is presently trading at 8.9x 1-year forward EV/EBITDA on
our EBITDA estimates (15% lower than consensus). Whilst on EV/tonne, the
stock is trading at a 4% discount to its last 4-5 year average (US$145/tonne);
on 1-year forward EV/EBITDA, the stock is trading at 14% premium. We expect
valuations to correct as EBITDA/tonne continues to decline for CY11 and
profitability reduces materially; we expect RoIC in CY12 and CY13 to decline
to 20% from 31% in CY10. Demand recovery and pricing discipline are the key
risks.
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