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Ambuja Cements (ACEM)
Cement
Profitability reflects seasonal low. Ambuja Cements (ACEM) reported results
marginally ahead of our estimates with net income at Rs1.7 bn—reflective of the
seasonal weakness for the cement business with volumes and pricing down 11% and
7% sequentially. We maintain our cautious stance on ACEM as the exuberance of
recent price increase only offsets the cost inflation, and does not fully reflect concerns
of an unfavorable demand-supply balance. Maintain SELL and PT of Rs135/share.
Cost rationalization drives operational outperformance
ACEM reported revenues of Rs18.1 bn (15% yoy, -17% qoq), operating profit of Rs2.9 bn (3%
yoy, -50% qoq) and net income of Rs1.7 bn (13% yoy, -51% qoq) against our estimate of Rs18
bn, Rs2.8 bn and Rs1.6 bn, respectively. Lower-than-estimated freight cost (partially offset by
higher raw material cost) led to EBITDA beat with profitability of Rs611/ton against our estimate of
Rs586/ton. We note that other expenses include prior-period expense of Rs206 mn, adjusting for
which, EBITDA was 12% ahead of our estimate. Net income was further boosted by lower-thanestimated
depreciation and higher other income. We discuss key details of the result in a
subsequent section.
Operating environment remains challenging; ’pricing discipline‘ could be tested
Our channel checks indicate a revival in prices in most of the regions beginning with West (mid-
September) and more recently in North and East India by Rs15-20/bag. We, however, note that
this is in line with the general seasonal trend going into the peak construction season and has
already been factored in our earning estimates. On the other hand, (1) continued weakness in
demand and (2) any potential action by the Competition Commission of India (CCI) could put to
test the current ’pricing discipline‘. We continue to remain skeptical of near-to-mid term prospects
of the industry given the skewed demand-supply scenario and believe that ACEM, at current
levels, does not sufficiently factor the potential earnings risk from factors discussed above.
Maintain SELL noting rich valuations and challenging macro environment
We maintain SELL on ACEM with a target price of Rs135/share. ACEM is currently trading at 8.3X
CY2012E EBITDA (above historical average of 8X) and EV/ton of US$179/ton on CY2012E
production as against a replacement cost of US$110-120/ton. We note that on a capacity metrics,
ACEM at US$162/ton (CY2012E capacity) is trading at 28% premium to UTCEM and 17%
premium to ACC. We note that current market price implies 34% yoy growth in profitability in
CY2012E (assuming a mid-cycle multiple of 7X) compared to 13% growth factored by us (3% in
CY2011E), which in our view is stretched given the current demand-supply dynamics and
utilization rates. We have revised CY2011E estimate by 2.5% to factor the outperformance.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� �
Ambuja Cements (ACEM)
Cement
Profitability reflects seasonal low. Ambuja Cements (ACEM) reported results
marginally ahead of our estimates with net income at Rs1.7 bn—reflective of the
seasonal weakness for the cement business with volumes and pricing down 11% and
7% sequentially. We maintain our cautious stance on ACEM as the exuberance of
recent price increase only offsets the cost inflation, and does not fully reflect concerns
of an unfavorable demand-supply balance. Maintain SELL and PT of Rs135/share.
Cost rationalization drives operational outperformance
ACEM reported revenues of Rs18.1 bn (15% yoy, -17% qoq), operating profit of Rs2.9 bn (3%
yoy, -50% qoq) and net income of Rs1.7 bn (13% yoy, -51% qoq) against our estimate of Rs18
bn, Rs2.8 bn and Rs1.6 bn, respectively. Lower-than-estimated freight cost (partially offset by
higher raw material cost) led to EBITDA beat with profitability of Rs611/ton against our estimate of
Rs586/ton. We note that other expenses include prior-period expense of Rs206 mn, adjusting for
which, EBITDA was 12% ahead of our estimate. Net income was further boosted by lower-thanestimated
depreciation and higher other income. We discuss key details of the result in a
subsequent section.
Operating environment remains challenging; ’pricing discipline‘ could be tested
Our channel checks indicate a revival in prices in most of the regions beginning with West (mid-
September) and more recently in North and East India by Rs15-20/bag. We, however, note that
this is in line with the general seasonal trend going into the peak construction season and has
already been factored in our earning estimates. On the other hand, (1) continued weakness in
demand and (2) any potential action by the Competition Commission of India (CCI) could put to
test the current ’pricing discipline‘. We continue to remain skeptical of near-to-mid term prospects
of the industry given the skewed demand-supply scenario and believe that ACEM, at current
levels, does not sufficiently factor the potential earnings risk from factors discussed above.
Maintain SELL noting rich valuations and challenging macro environment
We maintain SELL on ACEM with a target price of Rs135/share. ACEM is currently trading at 8.3X
CY2012E EBITDA (above historical average of 8X) and EV/ton of US$179/ton on CY2012E
production as against a replacement cost of US$110-120/ton. We note that on a capacity metrics,
ACEM at US$162/ton (CY2012E capacity) is trading at 28% premium to UTCEM and 17%
premium to ACC. We note that current market price implies 34% yoy growth in profitability in
CY2012E (assuming a mid-cycle multiple of 7X) compared to 13% growth factored by us (3% in
CY2011E), which in our view is stretched given the current demand-supply dynamics and
utilization rates. We have revised CY2011E estimate by 2.5% to factor the outperformance.
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