Ambuja Cements - Higher realization drives profitability; upgrade to Neutral - Centrum

Ambuja Cements' Q2CY12 result was above our estimates driven by higher realization of Rs4,632/tonne (vs. est. Rs4,463/tonne). The company reported revenue of Rs25.7bn (vs. est. Rs24.9bn) and EBITDA of Rs7.2bn (vs. est. Rs6.4bn). EBITDA margin at 28.2% was 2.3pp above our estimates of 25.9% primarily driven by better realizations. Adjusted profit at Rs4.7bn was 12.9% above est. Rs4.2bn. Going forward, with our expectation of demand improvement and uptick in utilization rate of the industry, we believe manufacturers will be able to pass on the increase in rising input costs to consumers and will be able to maintain operating margins. In Apr-May '12, the industry recorded despatches growth of 9.6% against 0% in the same period last year. We expect cement demand to grow at 8-9% in FY13E and FY14E. Over the past one year, cement prices have sustained at higher levels and the industry ensured price hikes despite lower utilization rates which compensated for increase in operating costs (freight, energy and raw materials) and resulted in expansion of operating margins. Our interaction with dealers indicate ~2.5% M-o-M increase in retail price in July which is likely to protect margins in the coming quarter even if the monsoon peaks (historically, we have seen a correction in cement prices during monsoons). We have revised our realization assumption by 3.1%/3% for CY12E and CY13E to factor in improvement in retail prices, which resulted in EPS upgrade of 14.6%/12.8% for CY12E/CY13E. Consequently, we revise our rating on the Stock from Sell to Neutral with a price target of Rs191, upside of 6.1% from its CMP.

- Higher realizations and volume boost profits and help to beat estimates: Higher cement realization (up 12.7% YoY against est. 8.6% YoY increase) and sales volume (up 4.7% YoY) resulted in 18.1% YoY growth in revenues to Rs25.7bn, 2.9% above our estimates of Rs24.9bn. EBITDA increased 24% YoY to Rs7.2bn during the quarter.

- Steep realization increase negates op. cost increase leading to EBITDA margin expansion: Operating costs increased 10.7% YoY led by 13.7% YoY increase in raw material costs, 7.5% YoY increase in employee costs and 12.6% YoY increase in freight cost/tonne. Despite higher operating costs, EBITDA margin improved 134bps YoY to 28.2% primarily driven by steep 12.7% YoY increase in cement realization. EBITDA/tonne increased 18.4% YoY (and 6% QoQ) to Rs1,304/tonne.

- Earnings estimates revised upwards due to higher realizations: We have revised our realization assumptions by 3.1%/3% for CY12E and CY13E which lead to 14.6%/12.8% EPS upgrade for CY12E/CY13E.

- Upgrade to Neutral: With sustained increase in cement prices over the past one year, cement manufacturers have been able to maintain/improve their op. margins. With our expectation of improvement in utilization rates over the next two years, we do not see any risk to pricing power of manufacturers which will result in improved earnings scenario. At the CMP, the stock trades at 14.1x CY13E EPS, 7.9x EV/EBITDA and EV/tonne of US$190.5. We upgrade our rating on the stock to Neutral from Sell earlier with a revised price target of Rs191 (earlier: Rs149), upside of 6.1% from its CMP.

Source : Equity Bulls

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