Ambuja Cements Silver Jubilee year, book some profit ::Macquarie Research

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Ambuja Cements
Silver Jubilee year, book some profit
Event
 Sell – negative triggers ahead: Taking stock post the release of the CY11
annual report which builds in higher cement prices and costs, we believe that
ACEM loos really expensive. We cut our earning estimates by 6-23% over the
next three years and cut our TP to Rs110 from Rs119, even as we roll
forward. We expect penalties by Competition Commission of India (CCI) and
declining cement prices during the monsoon season to be key negative
triggers ahead. Maintain Underperform.
Impact
 Valuations – building in perpetual margin expansion by 7%: Our DCF
analysis shows that at 7% volume growth assumption, ACEM’s current stock
price is factoring in EBITDA/t improvement by around 7% pa. We think this is
a very aggressive assumption, given the oversupply in the market.
 Our assumptions remain optimistic: We are building in 9% volume growth
for CY12 and also building in higher EBITDA/t of Rs993, or Rs99/t higher
YoY. This is based on the assumption that the current pricing discipline in the
industry will continue.
 But consensus is even higher: Consensus forecasts remain 5% higher than
our estimate for CY12 and CY13, respectively. It does appear that consensus
has built in the cement price hikes but is severely underestimating the cost
increase.
 Penalty by Competition Commission can take away 50% of net profit:
We believe that CCI is in its last stages of completing the enquiry against the
cement companies and will most likely announce penalties in the next month
or so. Based on recent trends, it is likely to be 6–7% of total revenue or
around 50% of Net Profit.
 No special dividend: This being the 25th year of ACEM, many anticipated a
special dividend which did not materialise. We expect Holcim (the parent
company) to take cash through dividends and not through royalties as some
have suggested.
Earnings and target price revision
 We reduce our estimates by 6%/11%/23% for CY12/13/14, respectively.
Price catalyst
 12-month price target: Rs110.00 based on a DCF methodology.
 Catalyst: Penalty by CCI possibly in April and cement price declines by June.
Action and recommendation
 Maintain Underperform: ACEM is currently trading at 18x CY12E PER, the
higher end of the historical range, which seems expensive as it is based on
maintaining the pricing discipline. It is also factoring in the possibility of margin
expansion, which we think looks unlikely. We suggest investors book profits
and wait for a cement price correction to accumulate for possible dividend
yield.