Ambuja Cement's Q3CY17 results (Neutral) - Strong volume growth marred by higher costs

Q3CY17 result highlights

• Adj PAT fell 8% yoy to Rs2.3bn: on higher costs as also lower other income (-12% yoy to Rs1.5bn; lower surplus cash and yields).
• Volume +9.8% yoy: to 5.03m t (incl clinker vols) helped by a low base as also robust demand in North (IHB) and steady demand in east (infra projects) and pick up in West (metro projects).
• Realizations +4.8% yoy (-Rs100/t qoq): to Rs4612/t helped by a low base (weak prices in West and North in Q3CY16). On a qoq basis, realizations decline was limited as decline in cement prices was offset by lower tax under GST. We note that Ambuja has not recognized VAT incentive of Rs380mn (Rs76/t for Q3CY17) in revenues as government is yet to notify continuation of the same.
• Cost/t +7% yoy (+9.8% qoq): to Rs3996 on higher RM costs (low flyash availability in North), as also higher freight costs (on rise in diesel prices). We note that P&F costs for Ambuja were benign compared to its peers due to lower share of petcoke (~60%), presence of low cost inventory and availability of linkage coal.
• EBITDA/t declined 8.4% yoy to Rs616: (-43%/Rs457 qoq) led by higher costs. Overall, EBITDA increased 0.6% yoy to Rs3.1bn led by higher volumes. We have treated the DMF reversal of Rs446m related to CY16 cost as prior period items

Key positives: Strong volume growth

Key negatives: Higher than expected costs

Impact on financials: CY17/CY18 EPS (standalone) revised up by 3% each to Rs6.1/8.1. Consol EPS revised up by 7.2%/6.2% to Rs7.1/9.9

Valuations & view:

With the long awaited corporate restructuring of ACC-ACEM behind, management is now focussing on operations and growth strategy and has thereby revived the Marwa-Mundwa project (albeit at a lower scale of 1.7mtpa to be operational by CY19E). Accordingly, we factor in a 6% volume CAGR over CY16-18 supported by gradual recovery in demand. This coupled with higher realizations and stable costs is likely to drive a 24% EBITDA CAGR (consol) over CY16-18E. However, consol valuations at 13.8x CY18E EV/EBITDA and US$166 on EV/t are factoring in the likely earnings revival. We maintain our Neutral rating on the stock.