MOSL: AMBUJA CEMENTS (Downgrade to Neutral)-In-line results-Downgrading to Neutral on valuation concerns

​Ambuja Cements: In-line results; Downgrading to Neutral on valuation concerns

(ACEM IN, Mkt Cap USD8.4b, CMP INR282, TP INR314, 11% Upside, Downgrade to Neutral)

• Strong volume growth led by favorable base: Volumes rose 10% YoY to 5.02mt, led by a favorable base. 3QCY17 standalone revenue of INR23.2b (+15% YoY) marginally exceeded our estimate of INR22.9b, led by realizations of INR4,621, which were up 5% YoY, but lower by 2% QoQ on weak pricing in north markets. Also, realizations were lower to the extent of INR75/t in 3QCY17, as VAT incentive of INR380m was not recognized.
  
• Higher RM cost impacts margins: EBITDA increased 15% YoY to INR3.54b, translating into a margin of 15.3% (-7.5pp QoQ, flat YoY). EBITDA/ton rose 5% YoY to INR706, but fell by INR367QoQ due to a 43% QoQ increase in raw material cost/t on higher prices of flyash and kiln shutdown of Bhattapara unit. Power & fuel cost/t increased 4% QoQ due to higher prices of petcoke and fuel. Other expenses declined 6% YoY due to the reversal of DMF charges of INR446m this quarter. PAT thus increased 10% YoY to INR2.7b.
  
• Limited capacity addition to constrain volume growth: We see limited share price upside from current levels, as: 1) Volume growth over CY17-19 would be restricted to ~5% due to capacity constraints. We estimate 85% utilization for ACEM in CY19, which we believe is aggressive, given its 40% exposure to west market. 2) Even after factoring in benefits from improvement in industry pricing and EBITDA/t of INR972/1,141 in CY18/CY19, valuations appear expensive at 15x/11.5x CY18/CY19x EV/EBITDA. 3) We value ACEM at 13x CY19E EV/EBITDA (7% discount to Ultratech multiple of 14x FY20EV/EBITDA), and see only 11% upside from current levels. We thus downgrade the stock to Neutral.