MOSL: AMBUJA CEMENTS (Neutral)-Margins impacted by cost push

Ambuja Cements: Margins impacted by cost push

(acem IN, Mkt Cap USD7.1b, CMP INR237, TP INR255, 7% Upside, Neutral)

• Muted volume growth: Volumes grew only 3% YoY to 6.22mt (est. of 6.32mt) due to capacity constraints and the impact from unavailability of rakes in the east. Realizations stood at INR4,602/t (+9% YoY, +1% QoQ), exceeding our estimate of INR4,525/t, led by higher pricing in east, partly offset by weak prices in north. The QoQ improvement in realizations was driven by higher other operating income (+INR300m QoQ, led by higher incentives). Thus, net sales came in line at INR28.6b (+13% YoY).
• QoQ decline in profitability due to cost push: Cost/t rose 2% QoQ (+5% YoY) to INR3,787 (est. of INR,3707), as raw material cost increased due to higher prices of flyash and slag. Other expenses increased 6% YoY (+7% QoQ) to INR5.1b due to higher ad spend and packing cost. Freight cost was flat QoQ, despite higher diesel prices, due to lead distance reduction. Hence, adj. EBITDA/t of INR815 (+34% YoY, -6% QoQ) was in line with estimate of INR818. EBITDA rose 39% YoY to INR5.07b (est. of INR5.17b), translating into a margin of 17.7% (+3.3pp YoY, -1.21pp QoQ). Tax rate was higher at 30.8% in 1QCY18 v/s 21.1% in 1QCY17. PAT rose 10% YoY to INR2.72b.
• Limited capacity addition to restrict volume growth: We see limited upside from CMP, as capacity constraints are expected to limit volume CAGR to 5-6% over CY17-19E (at 87% utilization in CY19). After factoring in an improvement in industry pricing, valuations appear expensive at 12x/10x CY18/19 EV/EBITDA. We value it 11x CY19 EV/EBITDA (15-20% discount to peers) and see only 7% upside from present levels. Maintain Neutral.