MOSL: AMBUJA CEMENTS (Neutral)-Margin improvement led by cost efficiencies

Ambuja Cements: Margin improvement led by cost efficiencies

(acem IN, Mkt Cap USD8.1b, CMP INR263, TP INR290, 10% Upside, Neutral)

• Healthy volume growth: Volumes rose 15% YoY to 5.9mt (est. of 6.0mt), led by strong growth in the IHB segment. 4QCY17 standalone revenue of INR26.8b (+20% YoY) was in line with our estimate. Realizations were higher than estimate at INR4,565/t (+4.5% YoY; -1% QoQ), possibly due to higher other operating income in 4QCY17.
• Lower other expenses boost margins: Cost/t declined 5% QoQ (flat YoY) to INR3,700 (est. of INR3,821) due to lower other expenses (-3% YoY), led by fixed cost-optimization measures. RM cost/t, including inventory adjustment, declined 63% YoY/65% QoQ. Hence, adj. EBITDA/t of INR865 (+315 YoY/+22% QoQ) was higher than our estimate of INR649 due to lower cost. EBITDA increased 52% YoY to INR5.08b (est. of INR3.9b), translating into a margin of 18.9% (+3.9pp YoY, +3.7pp QoQ). Tax rate was higher at 24.5% in 4QCY17 v/s 8% in 4QCY16. Adj. PAT rose 56% YoY to INR2.95b.
• Clinker capacity addition announced: The board has approved 1st phase of clinker plant in Rajasthan, with capacity of 1.7mt at a capex of INR13.9b.
• Limited capacity addition to constrain volume growth: We see limited upside in ACEM from CMP due to limited volume CAGR of 5% over CY17-CY19 (at 85% utilization in CY19) because of capacity constraints. After factoring in an improvement in industry pricing, valuations appear expensive at 14x/10x CY18/CY19 EV/EBITDA. We value it at 11.5x CY19E EV/EBITDA (15% discount to peers) and see only 10% upside from current levels. We maintain our Neutral stance on the stock.