MOSL: AMBUJA CEMENTS (Neutral)-Profitability improves on account of higher realizations
AMBUJA CEMENTS: Profitability improves on account of higher realizations
(ACEM IN, Mkt Cap USD6.2b, CMP INR215, TP INR225, 5% Upside, Neutral)
- Volumes decline but realizations improve: Volumes declined 9% YoY to 5.8mt in 2QCY19, as the pace of construction activities slowed down due to liquidity issues in the market. However, realizations increased 9% YoY (+11% QoQ) to INR5,117/t, led by strong prices in core markets. Thus, revenue of INR29.8b (-1% YoY) came in higher than our estimate of INR28b.
- EBITDA/t improves 24%QoQ: Cost/t increased 5% YoY to INR3,917 due to higher raw material cost/t and power & fuel cost/t. However, healthy realization growth facilitated a 24% YoY (+65% QoQ) increase in EBITDA/t to INR1,200. EBITDA, thus, grew 12% YoY to INR6.9b (our estimate: INR5.2b), translating into a margin of 23.4% (+3pp YoY, +7.5pp QoQ). Other income was down by 70% YoY, as the year-ago period included INR1.4b of dividend received from ACC. PAT stood at INR4.1b (-18% YoY; our estimate: INR3.1b).
- Key highlights from management presentation: (1) ACEM reduced consumption of purchased limestone. The rates of flyash and gypsum have also reduced. (2) Power & fuel cost was up marginally on account of higher fuel cost; however, the increase was restricted by higher consumption of alternative fuels. (3) Freight cost/t declined 7% YoY on account of network optimization, re-negotiation of contracts and a change in mode mix. (4) Company launched Ambuja RMC in Chandigarh on 26th Jun'19.
- Valuation view: We increase our EBITDA estimate for CY19 by 12% to factor in the increase in realizations. Consequently, our PAT growth estimate for the year is now up to 11%. Alongside, we also increase our EBITDA/PAT estimate by 10%/8% for CY20. The stock trades at 10.4x/9.6x CY19/20E EV/EBITDA. We value ACEM at 10.5x Jun'21 EBITDA, while ACEM's stake in ACC is valued at a holding company discount of 20% to arrive at a target price of INR225. Maintain Neutral.
Ambuja Cement is a holding company. Co. is engaged in the manufacture and bulk export of cement and clinker products. Through its subsidiaries, Co. is engaged in investment holding in cement industries; finance services; the manufacture of cement; and property development and construction projects.
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