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Ambuja Cement's Q2CY19 results (Outperformer) - Strong realisations drive earnings

Q2CY19 result highlights

• Adj PAT fell 17.5% yoy to Rs4.12bn: on lower other income (Rs1.4bn ACC dividend in 2Q18). Operational performance strong on realisations.
• Volume declined 8.4% yoy: to 5.87mn tons (incl clinker) led by weak demand scenario across regions, particularly in West. This was caused by slowdown in execution of projects due to general elections. Hence, utilisation declined to 79% vs 87% in 2Q18.
• Realisations spike: by +7.8% yoy at Rs5074/t (+Rs492/t qoq) due to sharp price hikes across regions, particularly north and east. This was further augmented by increased sales of premium products. Hence, revenue decline was restricted to 1% yoy to Rs29.8bn. Our channel checks suggest prices have started to correct by Rs5-15/bag across regions due to lean season.
• Cost efficiencies at play: Cost/t increased by 4% yoy to Rs3884/t largely led by negative operating leverage on employee and other costs apart from 1.5% increase in P&F costs (higher petcoke prices on yoy basis). However, on qoq basis, P&F costs fell by 7% yoy to reflect lower petcoke prices. Further, freight cost/t fell 8% yoy/4% qoq on network optimization, renegotiation of contracts and improved mode mix) and lower RM costs/t (-2.5% yoy; reduced consumption of purchased limestone and lower fly ash and gypsum prices).
• EBITDA/t increased 22.5% yoy to Rs1190 (+Rs465 qoq): on higher realisations. Hence, EBITDA increased 12.2% yoy to Rs6.98bn.   

Impact on financials: No change to consolidated CY19/20E EPS of Rs10/11.6

Valuations & view:

Ambuja delivered a strong quarter earnings despite a weak demand scenario led by strong improvement in realisations. However, realisations are expected to moderate in near term due to lean season and sustained weakness in demand. 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. Concurrently, sustained cost efficiencies will likely drive 26% earnings CAGR over CY18-20E. We believe consolidated valuations are attractive at 9x CY19E EV/EBITDA and US$107 on EV/t. Maintain Outperformer.