Sell Ambuja Cement; target Rs 140: KRChoksey

“Ambuja Cement reported a top line of Rs 1805 crore for Q3CY11, an increase of 15.4% y-o-y and a PAT of Rs 171.5 crore which increased by 12.7% on a y-o-y basis. The substitution of own produced clinker with the purchased clinker helped in offsetting the impact of higher coal prices. Ambuja Cement Ltd net revenues stood at Rs 1805.1 crore, a growth of 15.4% y-o-y from Rs 1564 crore in Q3CY10 and a decline of 15% on a q-o-q basis on back of decline in realization in the Aug-Oct quarter because of the monsoon factor. Dispatches for the quarter were 4.69 mn tonnes, higher by around 7.6% on y-o-y basis. The growth in top-line was also driven by the concentrated efforts of cement players, wherein the net realizations for Ambuja increased to ~Rs 192.4/bag, an increase in price of 6.5% on a y-o-y basis coupled with a growth in dispatches.”

“Ambuja’s per tonne realization improved 6.5% on a y-o-y basis to Rs 3848/tonne, however declined on a q-o-q basis due to the monsoon effect. The EBIDTA/tonne declined sharply on a q-o-q basis to Rs 681/tonne, mainly on back of a higher power & freight cost. . The substitution of own produced clinker with the purchased clinker helped in offsetting the impact of higher coal prices and raw material cost per tonne on a y-o-y basis increased by only 2.7% for Ambuja compared to 20.4% increase for ACC on a y-o-y basis. The effect of increase in diesel prices could be seen by an increase in selling & distribution expenses of ~ 12% on a y-o-y basis.”

“Pricing power seems to be coming back in the cement industry, this can be seen from the realization that cement companies have been able to earn even in a weak monsoon quarter. However we don’t foresee any significant margin expansion for the cement players as increase in realizations will be mainly to offset increase in costs. At current market price of Rs 161; Ambuja is trading at an EV/EBIDTA of 8.3x and an EV/Ton of ~ $171 its CY12E. We value Ambuja Cement at an EV/Ton of $150 its CY12E, a premium to the replacement cost on back of its operational efficiencies and leadership position in its key markets with a target price of Rs 140. Maintain Sell,” says KRChoksey research report.

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