Ambuja Cement's Q1CY19 results (Outperformer) - Weak realisations drag earnings

Q1CY19 result highlights

• Adj PAT up 42.9% yoy to Rs3.9bn: on higher other income (Rs1.3bn ACC dividend; CY18 ACC dividend income was in 2QCY18). Reported PAT at Rs4.27bn (+57% yoy) on tax related write back of Rs515mn.
• Volume see muted 2.4% yoy growth: to 6.39mn tons (incl clinker) led by strong growth in East (accelerated pre-election spending & faster execution of govt. sponsored housing & infra projects) offset by weak demand in North (extended winters). Utilisation at 86.6% (85% in 1Q18).
• Realisations declined: by +0.4% yoy at Rs4582/t (-Rs89/t qoq) due to fall in prices in East, which witnessed higher volume growth, offsetting the price hikes in West markets. Our channel checks suggest sharp price hikes (Rs35/bag) in Apr-19 across regions, which should support realizations going forward. Overall, revenues +2.3% yoy to Rs29.3bn.
• Cost/t +1.9% yoy: to Rs3857/t led by higher P&F cost/t (+8.9% yoy) due to usage of higher priced petcoke inventory. This was offset by lower freight costs/t (-1.6% yoy; higher axle load benefits, negotiation of warehousing with ACC etc) and lower RM costs/t (-6.9% yoy; higher fly ash usage at ~33% & low cost wet fly ash, higher clinker factor by using slag and lower consumption of purchased limestone). Further, other expenses/t declined by 5.6% yoy led by operating leverage and sustained efforts to contain fixed costs and improve efficiencies (lower SG&A, fixed costs, etc).
• EBITDA/t declines 11% yoy to Rs725: on lower realisations and higher costs. Overall, EBITDA fell 8.6% yoy to Rs4.63bn.   

Impact on financials: 3%/2% cut on both standalone and consolidated EPS

Valuations & view:

The quarter earnings were disappointing with weak volume growth and muted realisations. While realisations will likely improve in near term on recent hikes and improving demand-supply dynamics (mgmt. expects 7-8% industry growth in CY19), volume growth is likely to improve once the 3.1mtpa Marwa-Mundwa project is operational by 2HCY20. Accordingly, earnings are likely to grow at 26% CAGR over CY18-20E. We believe consolidated valuations are attractive at 9.5x CY19E EV/EBITDA and US$114 on EV/t. Maintain Outperformer.