Ambuja Cements, Q3FY13 Result Update :: Centrum

Lower sales volume impacts margin
Ambuja Cements’ Q4CY12 result was below estimates primarily due to lower sales
volume of 5.14mt (vs. est. 5.4mt) and higher depreciation cost (14.8% QoQ increase
after adjustment for Rs279.1mn related to earlier years). The company reported
revenue of Rs23.1bn (vs. est. Rs24.2bn), adj. EBITDA of Rs4.5bn (vs. est. Rs4.8bn) and
EBITDA margin of 19.3% (vs. est. 19.8%). Lower-than-expected op. profit and higher
depreciation resulted in adj. profit of Rs2.4bn (vs. est. 2.8bn). We expect cement
demand growth to improve going forward post dismal demand in Q2 and Q3 and
expect demand growth of ~8% in FY14E and FY15E driven by demand from housing,
infrastructure and real estate sectors. Going forward, we expect utilization rate of
the industry to improve to ~81% by FY15E against ~76.5% in FY13E, which is
expected to result in volume growth for manufacturers. We believe that
improvement in utilization rate will help sustain higher prices. We revise our
earnings estimates downwards by 12%/5.6% to Rs11.8/Rs14.6 for CY13E and CY14E
respectively. We roll forward our valuation multiple to CY14E and arrive at a price
target of Rs231 (earlier: Rs247) for Dec ’13. We maintain Buy rating on the stock.
Lower sales volume results and depreciation in lower profit: Lower cement
sales volume of 5.14mt (2.8% YoY decline) offset increase of 2.2% YoY increase in
realization and led to revenue decline of 0.7% YoY to Rs23.3bn. Led by lower sales
volume and higher op. costs, adj. EBITDA (adj. for Rs180.7mn towards claims in
respect to subsidies from the government for the period Jan 1, 2012 to June 30,
2012) declined 1.8% YoY to Rs4.5bn. EBITDA margin was down 21bps YoY to
19.3%. Depreciation during the quarter (adjusted for Rs279.1mn in respect of
earlier years) increased 27.3% YoY (and 14.8% QoQ) to Rs1.6bn. Decline in op.
profit and higher depreciation resulted in 17.9% YoY decline in adj. profit to
Rs2.4bn.

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Op. cost/tonne increases 2.5% YoY and impacts margin: Operating costs/tonne
increased 2.5% YoY led by 9.7% YoY increase in raw material costs, 52.5% YoY
increase in employee cost, 20.8% YoY increase in energy cost, 14.3% YoY increase
in freight cost and 3.6% YoY increase in other expenses. Lower sales volume and
higher op. costs negated the benefit of improvement in realization and op. margin
contracted 21bps YoY to 19.3%. EBITDA/tonne during the quarter was at Rs868
against Rs859 in Q4CY11.
Earnings estimates revised downwards: We are revising our EPS estimates
downwards by 12 %/5.6% to Rs11.8/Rs14.6 for CY13E and CY14E respectively to
factor in lower sales volume and pressure on cement prices recently. We have
revised sales volume estimate to 22.3mt (earlier: 23.5mt) and 23.4mt (earlier:
24.4mt) for CY13E and CY14E respectively.
Roll forward valuation multiple to CY14, maintain Buy: We expect cement
demand to improve going forward post dismal growth of ~2% in the last 6 months
to ~8% in FY14E and FY15E. The company enjoys one of the best operating
margins due to higher sales in non-trade segment and higher blending ratio. We
believe that earnings of the company will increase at a CAGR of 16.4% over CY12-
CY14E. During CY12, EPS of the company increased 32.7% YoY to Rs10.8 and op.
margin improved 2.8pp YoY to 25.5%. At the CMP, the stock trades at 16.9x CY13E
EPS, 9.6x EV/EBITDA and EV/tonne of US$172.9. We roll forward our valuation
multiple to CY14E and arrive at a price target of Rs231 (earlier: Rs247) for Dec ’13.
We maintain Buy rating on the stock.