Ambuja Cements - Sharp decline in EBITDA/tonne - Ambit

Ambuja's (ACEM) 4QCY12 results were below our expectations on nearly every metric, with volumes being marginally lower (4% below our estimate) and unitary EBITDA/tonne declining sharply (by 27% QoQ) because of a significantly higher-than-expected increase in other expenses and freight costs. Thus, PAT was 36% lower than our estimates. We expect unitary profit to recover in 1QCY13 but it would not regain all the lost ground, owing to continued increases in freight cost, limited increase in realisations (due to weak demand), and continued high capacity additions. We expect downgrades to our sub-consensus estimates for CY13 and valuation. The stock is trading at 9.4x CY13 EBITDA. We maintain our SELL stance.

Volume surprises negatively: Ambuja Cements' (ACEM) cement volume declined by 9% YoY to 5.1mn tonnes, 4% lower than our expectation. Realisation of Rs4,581/tonne (ex-operating income) was in line with our estimates. EBITDA/tonne declined by 27% QoQ to Rs891, 14% lower than our estimates. Whilst the unitary power and fuel cost declined by 9% QoQ, a significant increase in freight cost (up 12% QoQ) and other expenses (up 18% QoQ) led to a decline in EBITDA/tonne. PAT was significantly lower than our estimates, owing to the combined effect of lower EBITDA/tonne, and higher depreciation and tax rate.

Our view of the annual result: Similar to ACC and UltraTech , ACEM's volumes have increased at a lower rate than the industry—2.5% in CY12 vs industry growth of 6.5-7% but closer to the growth rate of ACC (2%) and UltraTech (4%). ACEM's annual capacity utilisation was at 79.1% vs 80.3% for ACC, ahead of the industry average of 75%. For the overall year, the company recorded an EBITDA/tonne of Rs1,180/tonne (up 27% from CY11); hence, total EBITDA was at Rs25.3bn in CY12 vs Rs19.9bn in CY11. The company has generated an operating cash flow (pre tax) of Rs22.5 bn in CY12 vs Rs20.8bn in CY11 and invested ~Rs1.8bn as capex. We believe the company's capex will be lower than that of ACC in CY13, due to lower capacity addition. However, we expect capex to increase from hereon, as the company adds capacities to compete in a market where small players are becoming more competitive because of increasing capacity share.

Where do we go from here? Before the 4QCY12 results, we had reduced our CY13 PAT estimates for ACEM by 3.5%. We expect to downward revise our PAT estimates, after factoring in the increase in diesel prices to our freight costs estimates. We are currently estimating total EBITDA to increase by 6% in CY13 (and EBITDA/tonne of Rs1,240). We expect that EBITDA could decline marginally. Our current PAT estimates of Rs17.3bn signify a 4.4% YoY growth; however, owing to a reduction in our EBITDA estimates, the overall PAT may decline or at best remain flat. We expect ACEM's volumes to increase (by 4% in CY13) behind industry volume growth of 8-9% and also lower than the growth of ACC (up 6% YoY in CY13) and UltraTech (up 8% YoY in FY14). We expect the new capacities of small/mid-sized regional players to garner higher share of institutional demand. We expect ACEM's realisation to increase by 7% (Rs348/tonne) in CY13.

Valuation and recommendation

The stock is trading at 9.4x one-year forward EV/EBITDA. On an EV/tonne basis, the stock is trading at US$187, at a 36% premium to the replacement costs (US$135-140) and 23% to the three-year average. We maintain our SELL stance on the stock, because we believe volume growth of pan-India players like ACEM will continue to lag the industry volume growth. Furthermore, the rising industry fragmentation and scale of the regional players will limit improvement in realisations and unitary profit. Our one-year forward fair valuation is Rs221, implying a 10.9x CY13 EV/EBITDA or a US$217/tonne. We expect our CY13 estimates and more likely our valuation to be downgraded by 7-10%. We maintain our SELL stance, because we believe these rich valuations can come under pressure owing to weak demand and rising input costs.

Source : Equity Bulls

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