Hold Ambuja Cements; target of Rs 187: FinQuest Securities

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Hold Ambuja Cements; target of Rs 187: FinQuest Securities

FinQuest Securities has recommended hold rating on Ambuja Cements with a target of Rs 187, in its February 13, 2012 research report.

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FinQuest Securities has recommended hold rating on Ambuja Cements with a target of Rs 187, in its February 13, 2012 research report.

"After posting disappointing performance during the first half of the previous calendar year, Holchim owned Ambuja Cement's performance turned around during the second half due to sharp improvement in realization and healthy volume growth. Cement volume sales rose 5% Y-o-Y (12% Q-o-Q) to 5.25 mn tonnes as demand in the company's key markets improved, while the realization improved 24% Y-o-Y (15% Q-o-Q) to Rs 4436 per tonne. Marked by improved realization primarily, the total revenue of the company in Q4CY11 rose 29% Y-o- Y (28.6% Q-o-Q) to Rs 23.58 bn. The company's performance in Q4CY11 surpassed the consensus estimates, while the adjusted net profit came in at Rs 3.2 bn, was in-line with our estimate of Rs 3.4 bn."

"Despite increase in cement price during the past several months, the company couldn't entirely pass on the higher cost of domestic coal. Coal India Limited (CIL) had raised the domestic price of coal in March 2011. Further rise in imported coal price & domestic freight expenses besides rupee depreciation continued to impact the margins despite the realization remaining at such healthy levels. Raw material cost and freight expenses also remained higher during Q4CY11. The EBIDTA margin in Q4CY11 as a result was marginally lower by 27 bps Y-o-Y (higher by 165 bps Q-o-Q) at 19.1%. After providing for finance charges (Depreciation allowance up 14% Y-o-Y to Rs 1238 mn, interest cost down 53% Y-o-Y to Rs 99 mn) the profit before tax rose 33% to Rs 3.57 bn. After excluding the extraordinary item, the adjusted net profit came in at Rs 3.23 bn, 28.2% higher compared to Q4CY10. The EPS for the quarter increased to Rs.1.97, as against Rs.1.69 in Q4CY10."

"Despite sharp sequential growth in volumes and realization witnessed by the company during the past two quarters, the performance for CY11 was disappointing as the volumes and realization remained under pressure during the first half. The total volumes for the full year rose 4.7% to 20.91 mn tonnes, while the average realization improved 10% to Rs 4072 per tonnes. The total revenue in CY11 rose 14.4% to Rs 86.03 bn, while high operating cost led to net profit for full year posting marginal decline of 2.8% to Rs 12.28 bn."

"The company's management believes that the prices are expected to remain volatile in the short-term due to demand-supply imbalances, while the cost pressures on account of rising cost of energy, logistics and raw material may impact the margins. Expected policy reforms, lower inflation and interest rates and expectations of higher infrastructure investment (USD 1 trillion) in the 12th Five Year Plan is expected to boost the cement demand in CY12."

"The company has huge exposure in the western and the northern markets where the demand and realization is relatively stronger than in other regions. We believe, the company being the major cement producer in the western market, is well positioned to increase its volumes as the demand improves further. In view of the company's volume sales and realisation in Q4CY11 coming in better than our expectations, we are raising our net sales estimates for CY12 from Rs 102.54 bn to Rs 106.95 bn, however since there is continued pressure on margins due to high cost and since the Q4CY11 net profit were lower than our estimates, we revise the EPS for CY12 marginally lower from Rs.11.2 to Rs.10. We had initiated coverage on the stock on 23rd November 2011, with a one year price target of Rs 170, which was achieved on 3rd February 2012. Although we believe that the company's key markets will continue to post healthy growth, most of these positives are already priced in the stock. While we revise our rating downwards from 'Buy' to 'Hold', there is still some more upside left in the stock. As a result we revise our target price upward to Rs 187 from our target of Rs 170. At the current market price of Rs 172 the stock is trading at PE of 17.2x and EV/EBIDTA of 8.9x CY12 earnings," says FinQuest Securities research report. 

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