Ambuja Cement's Q3CY19 results (Outperformer) - Strong realisations drive earnings

Q3CY19 result highlights

• Adj PAT increased 31.3% yoy to Rs2.35bn: was broadly in line with estimates as higher than estimated realisations were partially offset by higher costs.
• Volume declined 4.2% yoy: to 5.26mn tons (incl clinker) led by weak demand across regions, particularly in West. This was caused by slowdown in execution of projects due to heavy monsoons. The lower volumes led to 67% utilisation for the quarter (74% in 3QCY18).
• Realisations up by +4.9% yoy: at Rs4993/t due to sharp price hikes across regions in 1HCY19. This was further augmented by 17% yoy growth in premium products. Hence, revenue was up 0.5% yoy to Rs26.3bn. However, on a qoq basis realisations fell by Rs81/t (-1.6% qoq) as prices have corrected across regions from the peak levels of 2QCY19 but the correction has been restricted in West and North.
• No benefits of lower petcoke costs: Cost/t increased by 1.2% yoy to Rs4156 largely led by higher P&F costs on back of usage of high cost petcoke inventory (+13.7% yoy,+9.8% qoq) as also negative operating leverage on other costs (+9% yoy, higher ad spend, maintenance, etc). This was partially offset by lower freight cost/t (-3% yoy/+2.4% qoq) on network optimization, renegotiation of contracts, etc and lower RM costs/t (-27% yoy; largely negative change in stock).
• EBITDA/t increased 28.2% yoy to Rs836 (-Rs354 qoq): on higher realisations. Hence, EBITDA increased 22.8% yoy to Rs4.4bn.      

Impact on financials: No change to consolidated CY19/20E EPS of Rs10/11.7

Valuations & view

Ambuja delivered a decent quarter wherein the higher exposure to West protected realisation drop. However, cost did not see a declining trend and now would be a key monitorable area. Overall, we believe volume growth trajectory will see a gradual improvement as govt spending on infra and low cost housing sees an uptick. Over the long term, commissioning of 3.1mtpa Marwa-Mundwa project to be operational by 2HCY20 will drive growth. Accordingly, we expect 26% consolidated earnings CAGR over CY18-20E. We believe consolidated valuations are attractive at 8.6x CY19E EV/EBITDA and US$102 on EV/t. Maintain Outperformer.