Ambuja Cements - Q4CY11 Result update/ Estimate change - Centrum

Operating performance disappoints, maintain Sell

Ambuja Cements' Q4CY11 result was below estimates with EBITDA at Rs4.5bn vs. est. Rs5.2bn impacted by higher operating costs (other expenses increased Rs135/tonne and freight cost Rs72/tonne sequentially). A sharp increase in operating costs restricted operating margins at 19.5% vs. est. 22.6%. Cement prices continue to remain firm across the country after the decline seen in Q3 (during monsoons) and hence, realization increased Rs554/tonne QoQ (24.1% YoY and 14.4% QoQ increase) to Rs4,403/tonne. Though, we expect the earnings to reprove going forward on the back of high realization and our expectation of volume growth of 8-10% over the next two years for the cement industry, EBITDA margin is expected to remain in the range of 24-26% till CY13E, much lower than historical average margin of 30% for the period FY02-CY09. Average RoE of the company is expected to be 17.6% in CY12E and CY13E compared to peak cycle RoE of 32% between CY06-CY09. Though the higher cement price has sustained over the last four quarters, we remain cautious on the sustainability of continuous rise in cement prices across the country despite low industry utilization rate. We have rolled forward our valuation to CY13 and maintain Sell on the stock with revised price target of Rs149 (earlier: Rs127), downside of 16% from CMP.

- Higher realizations and volume help to post better results, but disappoints our expectations on operational levels: Higher domestic realization (up 24.1% YoY) and sales volume (up 5% YoY) resulted in 30.2% YoY growth in revenues to Rs23.3bn, 2.1% above our estimates of Rs22.8bn. Higher realizations led to 44.4% YoY increase in EBITDA to Rs4.5bn (est.: Rs5.2mn) and EBITDA margin of 19.5%, 3.1pp below our estimates of 22.6%. Adjusted profit of the company increased 37.1% YoY to Rs2.96bn, 6.6% below our estimates of Rs3.17bn. EBITDA/tonne increased 37.6% YoY to Rs859/tonne (est. Rs953/tonne).

- Increase in operating costs offset by steep increase in realization: Operating costs increased 21.2% YoY led by 13.4% YoY increase in employee expenses, 18.5% YoY in freight costs due to increase in railway freight rates and diesel price and 19.5% YoY increase in other expenses. Despite higher operating costs, EBITDA margin improved 1.9pp YoY to 19.6% primarily driven by steep 24.1% YoY increase in cement realization.

- Earnings estimates revised: We have revised our EPS estimates upwards by 8% to Rs9.4 for CY12E considering higher realizations during the quarter. However, our EPS estimates for CY13E stands revised downwards by 4.9% to Rs11 for CY13E primarily due to mounting cost pressures (operating cost/tonne increased 21.2% YoY and 9.8% QoQ during Q4CY11).

- Rolling valuations to CY13, maintain Sell on stretched valuations: At the CMP, the stock trades at 16.2x CY13E EPS, 9.2x EV/EBITDA, 2.8x P/BV and EV/tonne of US$199.1. We roll forward our valuation to CY13E and maintain Sell on the stock with revised price target of Rs149 (earlier: Rs122), downside of 16% from CMP.

Source : Equity Bulls

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