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Ambuja Cement's Q1CY18 results (Neutral) - Volume disappoints – lack of capacity adds

Q1CY18 result highlights

• Adj PAT +10% yoy to Rs2.7bn: on higher realizations and lower than expected costs, partly offset by higher tax rate.
• Volume +3.1% yoy: to 6.23m t (incl clinker vols), below industry growth of ~8% in Q1CY18 indicating loss in market share. Growth was muted due to weak demand in West and East (rake unavailability).
• Realizations +8.5% yoy (+Rs29/t qoq): to Rs4598/t due to higher cement prices. Prices were also supported by higher share of premium products. On a qoq basis, realizations improved due to price hikes in North and Central. Our channel checks suggest improvement in prices particularly in West which would support realizations going forward.
• Cost/t +5.5% yoy (-2.1% qoq): to Rs3783 due to higher P&F costs (+14% yoy; higher petcoke/coal prices) and higher freight costs (+8.5% yoy; rise in diesel prices, higher leads, higher FOR sales and rake unavailability in East). Share of petcoke stood at 65%. On a qoq basis, P&F costs declined by 7% despite higher petcoke prices due to high base (higher clinker production in Q4CY17).
• EBITDA/t increased 24.8% yoy to Rs814: (+Rs50 qoq) led by higher realizations. Overall, EBITDA +29% yoy to Rs5.1bn.  
• Royalty - status quo: Ambuja’s board recommended the renewal of its Technology & Know-how’ agreement with Holcim on same terms that would be valid for 3 years (till CY20), subject to shareholder approval.

Key positives: Realization improvement

Key negatives: Weak volume growth

Impact on financials: No change - CY18/19 EPS at Rs7.6/Rs10 (consol)

Valuations & view:

Ambuja’s volume growth is constrained by lack of capacity additions (1.7mtpa Marwa-Mundwa expected by 2HCY20E). Accordingly, we factor in a 6.5% volume CAGR over CY17-19 supported by gradual recovery in demand. On the other hand, ACC-Ambuja boards have approved the Master Supply Agreement (MSA) which would drive ~Rs30/t savings for Ambuja. This coupled with higher realizations is likely to drive a 14% EBITDA CAGR (consol) over CY17-19E. The stock is trading at 11x CY19E EV/EBITDA and US$138 on EV/t (consol). We maintain our Neutral rating on the stock considering lower than industry volume growth.