Ambuja Cements - Results fall short of expectations; maintain Sell - BRICS

ACL's results were disappointing with adjusted PAT at Rs3.31bn coming in below our estimate of Rs4.23bn, due to lower than expected volume and realisation. Revenue fell 3.4% yoy, due to weak demand. Flat yoy realisation and escalating costs pulled EBTDA margin down by 816bps yoy to 20.1%. Cement prices are exhibiting extreme volatility owing to oversupply, while demand is showing no signs of a rebound. Amidst such a scenario, ACL's EV/tonne valuation of US$159 appears unjustified. Maintain Sell.

Poor volume impacts topline: Cement volume fell 4% yoy, as demand remained poor, while average realisation was flat yoy, but down by Rs1/bag qoq. Consequently, overall revenue declined 3.4% yoy.

Margins contract sharply: ACL's freight/tonne was up14% yoy, fuelled by hikes in railway freight and monthly increases in diesel prices. However, softening in international coal prices helped ACL record a decline of 5% yoy and qoq in fuel cost/tonne. Flat realisation, coupled with higher freight and administration costs, resulted in EBIDTA margin contracting by 816bps yoy to 20.1%, while EBITDA/tonne fell to Rs850 vs. Rs1203 in Q1CY12. After adjusting for prior period CENVAT credits related to fuel and other expenses, write back of prior period interest on income tax and tax credit related to earlier years, ACL's adjusted PAT declined 35% yoy to Rs3.31bn, as against our expectation of Rs4.23bn.

Revising estimates: We have lowered our EPS estimates for CY13 and CY14 by 18.2% and 17.5%, to factor in lower price realisation for CY13.

Capex: ACL has announced the setting up of a 4.5mn tonnes greenfield plant in Nagaur, Rajasthan, which is expected to become operational by CY15.

Expensive valuation: At its CMP, the stock trades at EV/tonne of US$159, which is at a substantial premium of 22% to replacement cost. With demand remaining sluggish, the current oversupply scenario will continue to exert pressure on cement prices, thus resulting in earnings volatility. Cement prices remain weak and are unlikely to increase yoy over the next two quarters, given the high base of CY12. Hence, we believe that ACL's premium valuations are not justified. Maintain Sell.

Source : Equity Bulls

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