Sell Ambuja Cements; target of Rs 151: FinQuest Securities

“Fall in gross realization for Ambuja Cements in Q1CY12 as compared to Q4CY11 resulted in the net sales for the company coming in lower than our estimate. The total revenue came in at Rs 26.61 bn (+19.7% Y-o- Y, +12.9% Q-o-Q) as compared to our estimate of Rs 28.34 bn. The cement dispatches for Q1CY12 rose 9.8% Y-o-Y (15% Q-o-Q) to 6.05 mn tonnes. However the gross realization during the quarter posted a negative growth of 2% Q-o-Q (+8.7% Y-o-Y) to Rs 4353 per tonne. Negative growth in realization was unexpected especially Q1 and Q2 CY being the peak season for the cement industry. Now this may impact the profitability going ahead as various cost heads are further expected to rise while the cement prices as per our view has reached a peak. Fall in realisation Q-o-Q amplifies the fact that the cement prices have reached their peaks.”

“The EBIDTA margin for the company in Q1CY12 improved 80 bps Y-o- Y (995 bps Q-o-Q) to 29% on account of saving made on the freight expenses. Rather other cost heads like the power & fuel expenses and raw material cost has increased as Coal India (CIL) increased the price of coal after their recent wage hikes. Going ahead as CIL further increases coal prices and as fuel prices increases, we may witness further pressure on margins. The cost per tonne in Q1CY12 rose 7.8% Y-o-Y to Rs 3122 although it was lower by 14.1% Q-o-Q as a result the EBIDTA per tonne only rose by 12.2% Yo- Y (49% Q-o-Q) to Rs 1276.”

“The overall cement demand growth in India continue to be at creepy phase, while the cost inflation is only expected to worsen given that CIL is under severe pressure to raise prices going ahead. Further increase in fuel (petrol and diesel) costs is expected to hike the freight expenses of the cement companies sharply. The cement prices across the country are currently quoting at all time high levels. Thus the flexibility to pass on the cost increase from here on appears limited and could pressurize the margins going ahead. At some point we believe that there would be government intervention to control prices. The regulatory uncertainty with regard to the investigation by Competition Commission of India (CCI) on cartelization charges by cement major is another major overhang.”

“The net profit after tax for the company in Q1CY12 came in at Rs 3.12 bn, which was 23.4% lower Y-o-Y and just 3.3% up Q-o-Q. This was primarily due to a one time additional depreciation charges of Rs 2.79 bn caused due to change in method of providing depreciation on captive power plants from straight line method (SLM) to written down value (WDV) method with retrospective effect. The adjusted net profit as a result came in at Rs 5.09 bn (+25% Y-o-Y, 57.7% Q-o-Q). Adjusted EPS for the quarter came in at Rs 3.32.”

“We continue to believe that the cement demand growth will improve going ahead and that would improve the demand supply dynamics. The company's pan India presence will help in ramping up volume growth especially from the south and the western region as demand here improves. Nevertheless the room to increase price on the back of healthy demand would be absent, thus we are concerned about the pricing growth and margins going forward. We believe that at some point there would be government intervention in some form or the other to control or even reduce price while the investigation pertaining to cartelization by CCI presents incremental uncertainty. Considering the pricing and margin pressure going ahead we are lowering our net sales and EPS estimates for CY12 from Rs 106.95 bn and Rs 10 to Rs 101.13 bn and Rs 9.6 respectively. We had initiated coverage on the stock on 23rd November 2011, with a one year price target of Rs 170. The target was achieved on 3rd February 2012 after that we had lowered our rating to hold with a new price target of Rs 187.”

“The stock retreated after reaching very close to our revised target. While we continue to be positive on the cement industry macro, we believe that the current price is not factoring in the risk related to further increase in coal price by CIL and potential penalty arising out of the investigation by CCI. Besides going ahead as we enter the monsoon season we would witness some fall in realization especially in the western and the southern region. We revise our rating from 'Hold' to 'Sell' with a new target price of Rs 151 (EV per tonne of USD 138 - 50% discount to the average EV per tonne of the previous five years, PE of 16x and EV/EBIDTA of 8.3x CY12E earnings). We cite imminent margin pressure due to coal price increase by CIL, higher freight expenses due to rising fuel prices, probable penalty from CCI investigation and limited pricing power for the industry from these levels. At the current market price of Rs 161 the stock is trading at PE of 16.8x and EV/EBIDTA of 8.9x CY12 earnings,” says FinQuest Securities research report.        

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