Ambuja Cements - Q1CY12 Result Update - Higher margin and other income boost adj. profit - Centrum

Ambuja Cements' Q1CY12 result was better than our estimates on operational parameters with EBITDA at Rs7.4bn (vs. est. Rs7.2bn) and EBITDA margin at 28.3% against estimates of 27%. The company reported revenue of Rs26.3bn, lower than est. Rs26.8bn primarily due to lower sales volume of 6.05mt vs. est. 6.1mt and realization at Rs4,353/tonne vs. est. Rs4,403/tonne. EBITDA margin at 28.3% was 125pp above our estimates of 27% mainly due to lower than expected other expense (Rs648/tonne against est. Rs690/tonne). Higher other income (Rs1,147mn against estimates of Rs720mn) and lower tax rate (29.4% vs. est. 32%) resulted in 11.6% higher than estimated adjusted profit (adjusted for one time depreciation charges due to change in depreciation policy from SLM to WDV for captive power plants) of Rs5.1bn. Though, we expect the earnings to improve going forward on the back of higher 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 23-24% till CY14E, much lower than historical average 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. We maintain Sell on the stock with price target of Rs149, downside of 9.7% from its CMP.

Higher realization and volume help to post better results: Higher cement realization (up 11.2% YoY) and sales volume (up 7.3% YoY) resulted in 19.3% YoY growth in revenues to Rs26.3bn, 1.9% below our estimates of Rs26.8bn. Higher realization and volume led to 21.7% YoY increase in EBITDA to Rs7.4bn (est.: Rs7.2mn) and EBITDA margin of 28.3%, 1.2pp above our estimates of 27%. Adjusted profit of the company increased 24.5% YoY to Rs5.1bn, 11.6% above our estimates of Rs4.5bn primarily due to higher other income and lower tax rate during the quarter. EBITDA/tonne increased 13.5% YoY to Rs1,231/tonne (est. Rs1,190/tonne).

Increase in operating costs offset by steep increase in realization: Operating costs went up 10.4% YoY led by 21.3% YoY increase in energy costs due to higher domestic coal price, 10.3% YoY increase in freight costs due to higher railway freight rates and diesel price and 19.8% YoY increase in raw material costs due to higher gypsum and fly ash prices. Despite higher operating costs, EBITDA margin improved 56bps YoY to 28.3% primarily driven by steep 11.2% YoY increase in cement realization.

Earnings estimates revised marginally upwards: We have revised our EPS estimates upwards by 3.7% to Rs9.7 for CY12E and 3% to Rs11.3 for CY13E considering higher other income and higher sales volume (22.2mt vs. 22.1mt for CY12E and 23.5mt vs. 23.4mt for CY13E).

Challenges persist, maintain Sell on stretched valuations: At the CMP, the stock trades at 14.6x CY13E EPS, 8.2x EV/EBITDA, 2.5x P/BV and EV/tonne of US$176. We maintain Sell on the stock with price target of Rs149, downside of 9.7% from its CMP.

Source : Equity Bulls

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