Ambuja Cements - Numbers below estimates, higher prices will lead to better earnings - Centrum

Ambuja Cements' Q3CY12 operating margin was below estimates primarily due to 0.4% QoQ fall in realization against our estimate of 1% QoQ increase in realization. EBITDA margin at 23.8% was 1.3pp below our estimates of 25.1%. The company reported revenue of Rs21.7bn (vs. est. Rs22bn) and EBITDA of Rs5.15bn (vs. est. Rs5.5bn). Lower margins and higher depreciation (Rs1.37bn vs. est. Rs1.22bn) led to adjusted profit of Rs3bn, 13.7% below est. Rs3.5bn. Going forward, we expect utilization rate of the industry to improve to ~81% by FY15E against ~76.5% in FY13E, which will also drive volume growth for manufacturers. We expect cement demand growth of ~7% in FY13E and 8-9% in FY14E driven by demand from housing, infrastructure and real estate sectors. Improvement in utilization rate will also help the manufacturers to enjoy better pricing power. Our interaction with dealers indicates ~2% M-o-M increase in retail price in October after the price decline in August and mid-September. We expect realization to improve ~2-3% QoQ in Q4CY12E and hence, earnings should improve going forward. We maintain Buy on the stock with price target of Rs256, upside of 26% from its CMP.

- Cement prices remain strong and improves profitability: Higher cement realization (up 19.9% YoY) led to 20.1% YoY growth in revenues to Rs21.7bn. Cement sales volume was up 0.2% YoY to 4.7mt. Driven by higher realization, EBITDA increased 77.1% YoY to Rs5.15bn during the quarter. Adj. PAT was up 77.3% YoY to Rs3bn.

- Steep realization increase negates higher op. cost leading to EBITDA margin expansion: Operating costs/tonne increased 8.9% YoY led by 11.1% YoY increase in raw material costs, 11.3% YoY increase in employee costs, 13.4% YoY increase in energy costs, 20.7% YoY increase in freight costs and 19.5% YoY increase in other expenses. Despite higher operating costs, EBITDA margin improved 7.6pp YoY to 23.8% primarily driven by steep increase in cement realization. EBITDA/tonne increased 76.7% YoY to Rs1,096/tonne.

- Non-exposure to South region will help the company; plans expansion of ~4mt in next three years: The company has no exposure to the South markets, where we expect utilization rate to remain below 70% till FY15E. The company is setting up a 0.8mt grinding unit in Bihar which is expected to get commissioned by Q1CY13E. It is in the initial stages of setting up 3mt capacity in Rajasthan, which is expected to get commissioned by H1CY15E.

- Maintain Buy as earnings are set to improve: We believe that cement manufacturers will be able to enjoy better pricing power as we expect uptick in utilization rate for the industry going forward. The company enjoys one of the best operating margins due to higher sales in trade segment and higher blending ratio. We believe that earnings of the company will increase at a CAGR of 25.5% over CY11-CY15E. In 9 months ended Sept-12, earnings of the company improved 30.4% YoY and we expect earnings to grow by 38.2% in CY12E. At the CMP, the stock trades at 14.6x CY13E EPS, 8.4x EV/EBITDA and EV/tonne of US$200.9. We maintain Buy on the stock with a price target of Rs256, upside of 26% from CMP.

Source : Equity Bulls

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