Reduce Ambuja Cements; tgt Rs 84: Emkay

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Emkay Research has maintained reduce rating on Ambuja Cement in its report dated July 28, 2008, with price target of Rs 84.

"ACL's Q2CY2008 pre-exceptional net profit at Rs 2.63 billion is sharply below our expectations (Rs 3.4 billion) primarily because of higher than expected raw material cost (Cost Rs 390 per ton up 59% yoy) and higher power & fuel cost (Cost Rs 711 per ton up 30% yoy). Revenues at Rs 15.7 billion for Q2CY2008 grew by 7% yoy entirely driven by higher realisation as the volumes for the quarter remained flat. Under the pressure of relentless increase in costs, ACL's operating profit, for the quarter declined by 13% yoy to Rs 4.75 billion. For a fifth consecutive quarter ACL OPMS have shown a decline. The OPMs at 30.2% declined by a huge 700 bps yoy and 96 bps qoq. ACL's pre-exceptional net profit declined by 35% yoy to Rs 2.63 billion where as the reported net profit, which includes an exceptional one time gain (Rs 3.14 billion) on account of sale of land and building and sale of ACL's 11.1% stake Ambuja Cement India Ltd stood at Rs 5.77 billion as against Rs 8.77 billion a decline of 34%. On account of below expectation results, we are downgrading our earnings estimates for ACL by 15%. Our EPS estimates now stands at Rs 7.4 for CY2008 and Rs 6.8 for CY2009. At current levels ACL's valuation at 12X its CY2008 earnings and EV/Ton of USD 145 for its CY2008 capacity, looks fully valued keeping in mind significant capacity additions of 70 million tonnes lined up by the industry over next two year. The capacity addition we believe would disturb the demand supply equation and would weaken pricing power of cement producers. Also the mounting cost pressures are likely to put pressures on ACL's OPMs resulting in negative earnings CAGR 11% over CY2008-10E. We maintain our REDUCE rating on the stock with a price target of Rs 84". 

Valuation:

"At current levels ACL's valuation at 12X its CY2008 earnings and EV/Ton of USD 145 for its CY2008 capacity, looks fully valued keeping in mind significant capacity additions of 70 million tonnes lined up by the industry over next two year. The capacity addition we believe would disturb the demand supply equation and would weaken pricing power of cement producers. Also the mounting cost pressures are likely to put pressures on ACL's OPMs resulting in negative earnings CAGR 11% over CY2008-10E. We maintain our REDUCE rating on the stock with a price target of Rs 84".

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