Ambuja Cement's Q2CY18 results (Upgrade to Outperformer) - Cost efficiencies at play

Q2CY18 result highlights

• Adj PAT +27% yoy to Rs5bn: on strong operational performance (strong beat on realizations and costs vs estimates).
• Volume +5.6% yoy: to 6.41mn tons (incl clinker vols) led by uptick in demand particularly from IHB and infrastructure segment.
• Higher prices in East & share of premium products aid realisations: Realizations were flat yoy (+Rs109/t qoq) at Rs4707/t. On a qoq basis, realizations improved due to better prices in the East as well as robust sales of premium products such as Compocem and Roof Special. Our channel checks suggest cement price hikes in Jun-18, notably in North & Central, which should support realizations going forward. Overall, revenues +5.5% yoy to Rs30.2bn.
• Cost/t +2.7% yoy (-1.3% qoq): to Rs3736 led by higher P&F costs (+9.8% yoy; higher petcoke prices; 69% share) and freight costs (rise in diesel prices, unavailability of rakes), partly offset by lower RM costs (-13% yoy; decrease in stocks). On a qoq basis, costs/t declined due to positive operating leverage as well as stable P&F costs despite higher petcoke prices on efficiency and productivity improvements.
• EBITDA/t declined 9.5% yoy to Rs971: (+Rs156 qoq) on higher costs. Overall, EBITDA fell 4.4% yoy to Rs6.2bn.  

Key positives: Robust realizations, steady P&F costs qoq

Key negatives: Higher freight costs

Impact on financials: Upgrade CY18/19 consol EPS by 13%/7% to Rs8/10.

Valuations & view:

With the long awaited corporate restructuring of ACC-ACEM behind, management is now focussing on operations and growth strategy, which is visible with strong cost control in both fixed and variable costs (P&F). As the MSA agmt with ACC is executed and the commissioning of the captive coal block (Jul-18) should drive further savings. Concurrently, it is looking to expand capacity via the Marwa-Mundwa project (first phase of 1.7mtpa to be operational by 2HCY20; total 3.1mtpa), which should drive long term growth. Accordingly earnings are likely to grow at 17% CAGR over CY17-19E. Considering the sharp stock correction (20%+ over the past 6M), we believe consol valuations at 9.3x CY19E EV/EBITDA and US$109 on EV/t are attractive. Upgrade to Outperformer.