Ambuja, ACC Q3: Religare Cap expects strong YoY numbers

Cement stocks will be in focus today as Ambuja Cements and ACC declare their September quarter earnings. In an interview to CNBC-TV18, Mihir Jhaveri, Religare Capital Markets speaks about his expectation from the cement majors.

ACC Q3: Analysts see 68% growth in PAT to Rs 268 cr Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee. Q: What are your expectations from Ambuja Cements today? A: Ambuja, we expect a profit growth of 142 percent on a YoY basis. Last year, the base was pretty low. So, we will see around Rs 3.7 billion kind of a number. The key thing to watch out would be the margin expansion. How it happens on a YoY basis? Sequentially, you may see certain dip because of the price. That is the broader expectation that the numbers would be pretty robust. Q: What about the margin performance for Ambuja, given how realisations have been? A: The realisations have increased by 20 percent on a YoY basis. So, you will have a margin expansion of closer to 900 bps on a YoY basis. So, probably you will see the margins being pretty strong for this quarter, if you compare it from a YoY perspective. Q: What about ACC? Are you expecting as strong numbers? A: ACC, we are expecting 100 percent growth. They had a very bad quarter last year.You have a very good price increases overall as well. So, for ACC also there will be 100 percent increase in PAT. We will also have some margin expansion closer to 700 bps in ACC as well. So, both are expected to report pretty strong set of numbers, if you compare it on a YoY basis. Q: What is your general take on the cement cycle? Stock prices have been remarkably strong, but people are skeptical about current numbers. Do you see utilisation levels for most cement companies picking up dramatically over the next few quarters? A: Let us talk more from a longer-term perspective. If you look at one or two-year perspective now, you will see the cycle improving further as well. So, you will see utilisation levels improving as the incremental capacity addition is going to be much lower. If you assume around eight-nine percent growth in terms of dispatches going forward, the utilisation should improve. So, some of the upper half of India not centrally eastern based companies will have much better utilisation levels compared to south. ACC and Ambuja being pan India the utilisation levels should move up. _PAGEBREAK_ Q: While a lot of people may be bullish on the sector, they are a bit cautious about valuations and where they have reached with ACC and Ambuja. They like to look down the sector curve into some of the midcaps. What are the midcaps that you cover and are bullish on the cement space where valuations are not this demanding? A: In midcaps, we like Shree Cement, JK Lakshmi Cement, and Orient Paper. We feel that there is some more leg up in these stocks as valuations are not that expensive. These companies are operationally quite efficient. So, the numbers are going to be pretty strong as well. Shree has come out with its results. They have delivered some strong set of numbers. Similar would be the case for these two names as well. These are our picks largely in the midcap space as well, if someone is looking from a six to nine months time horizon or one-year perspective. Q: There is some talk, unconfirmed so far, that Holcim might ask for 2 percent of revenue royalty from ACC and Ambuja. Do you see that as a possibility? How much would it set earnings back buy, if that were to happen? A: I am not sure. We are just going through the annual reports as well. We just saw ACC, Ambuja’s annual report. You are already having that technical service charge which has been levied on them; 0.6 or 0.62 percent of sales has been there in ACC in 2010-2011, in Ambuja, it was there in 2011. I am not very sure whether anything would be announced or anything would be coming out because probably that may get increased, but I don’t think that any announcement should come. That is the buzz there that will be increased, but I am not very sure about that. As far as impact is concerned, if you take 1 percent increase in terms of royalty payment or any such technical know how, it will impact the earnings by 6 to 8 percent. For ACC, it would be little bit higher. For Ambuja, it will be closer to 6 percent. We will just wait and watch.