Ambuja Cement's Q4CY17 results (Neutral) - Strong end to the year

Q4CY17 result highlights

• Adj PAT +67% yoy to Rs2.8bn: on strong operational performance.
• Volume +15.3% yoy: to 5.87m t (incl clinker vols) helped by a low base (-8% in 4Q17; demonetization impact) as also uptick in demand.
• Realizations +4.5% yoy (-Rs47/t qoq): to Rs4565/t helped by a low base (weak prices in West and North in Q4CY16). On a qoq basis, realizations declined due to weak prices across markets particularly in West. Note that we have excluded VAT incentive of Rs331mn for past quarters (2Q/3Q17) in revenues (treated as exceptional item).
• Cost/t flat yoy (-7.4% qoq): to Rs3700 as higher P&F costs (higher petcoke prices, petcoke ban impact, higher clinker production) and higher freight costs (rise in diesel prices, higher leads) were offset by lower RM costs (decrease in stocks) and positive operating leverage.
• EBITDA/t increased 31.5% yoy to Rs865: (+Rs249 qoq) led by higher realizations. Overall, EBITDA +52% yoy to Rs5.1bn.
• CY17 adj. PAT at Rs11.8bn (+28% yoy): as revenues +14% (+7% vols; +6% realn). Costs/t +6% yoy on higher freight and power costs leading to EBITDA/t +4.6% yoy to Rs824. Hence, EBITDA +12% yoy to Rs19bn.
• Marwar Mundwa phase 1 approved: with clinker capacity of 1.7mtpa out of total 3.1mtpa planned. Capex for phase 1 would be Rs13.9bn (US$125/t) and it is likely to be commissioned by 2HCY20.

Key positives: Strong volume growth, lower other expenses

Key negatives: Higher P&F, freight costs, Lower other income

Impact on financials: CY18 parent EPS cut by 1% to Rs7.3, consol EPS by 2% to Rs8.9

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 CY20E). Accordingly, we factor in a 7% volume CAGR over CY17-19 supported by gradual recovery in demand. This coupled with higher realizations and stable costs is likely to drive a 18% EBITDA CAGR (consol) over CY16-18E. However, consol valuations at 11.1x CY19E EV/EBITDA and US$150 on EV/t are factoring in the likely earnings revival. We maintain our Neutral rating on the stock.