Ambuja Cement HOLD. Muted volume growth a concern. 4 May 2018 India Cement Company Update
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- Ginger Tucker
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1 4 May 2018 India Cement Company Update Ambuja Cement HOLD Muted volume growth a concern Ambuja Cement (Ambuja) s 1QCY18 EBITDA beat our expectations primarily on lower costs. Revenues rose 12% YoY primarily on realisation improvement of 8%. On a sequential basis, realisations remained flat. Volume growth for the quarter remained muted (+3% YoY) but EBITDA grew 29% YoY and exceeded expectations primarily on lower expenses. EBITDA/t was reported at INR 806/t (vs. INR 647/t in 1QCY17), as realisation growth and lower raw material costs more than offset freight and power/fuel cost escalations. We believe Ambuja s long-term growth is constrained by its clinker capacity and limited expansion plans (phase 1 expansion of 1.7MTPA of clinker at Marwar Mundwa expected by 2HCY20). As a result, we expect Ambuja s market share to decline in the interim and see limited upside from current levels. We continue to value the existing assets at 12x EVE and incorporate INR 10 on account of its expansion potential. Our TP is INR 260 (Mar 19) and we maintain HOLD. Revenues +12% YoY on realisation improvement: 1QCY18 revenues stood at INR 28.6bn, growing c.11.7% YoY (6.7% QoQ) on 8.2%/3.3% realisation/volume growth. Volume growth remained muted primarily on capacity constraints; capacity utilisation stood at 85% for the quarter. Realisations at INR 4,551/t improved YoY on increased sales of premium brands Compocem and Roof Special as per management; realisations remained stable on a sequential basis. EBITDA/t improves on realisations: EBITDA at INR 5.1bn grew 29% YoY, beating our expectations on lower power/fuel expenses. EBITDA/t was recorded at INR 806/t vs. INR 647/t during 1QCY17, higher on realisation improvement (+INR 343/t impact on EBITDA/t), lower raw material costs (+INR 41/t impact) partially offset by escalations in power/fuel (-INR 125/t impact) and freight costs (-INR 92/t impact). PAT was recorded at INR 2.7bn vs. INR 2.5bn in 1QCY17. Petcoke/coal-price escalations led to higher power/fuel costs and diesel-price escalations led to higher freight costs. Status quo on Tech Know-How agreement: Ambuja s Board recommended the renewal of its Technology and Know-how agreement with Holcim, which expired on 31Dec 17. The terms and conditions of the agreement would remain unchanged and it would be valid for three years from 1Jan 18. The agreement will be subject to shareholder approval. This development reduces the risk of higher fee payment by ACC/Ambuja Abhishek Anand CFA abhishek.anand@jmfl.com Tel: (91 22) Roshan Paunikar roshan.paunikar@jmfl.com Tel: (91 22) Recommendation and Price Target Current Reco. HOLD Previous Reco. HOLD Current Price Target (12M) 260 Upside/(Downside) 9.8% Previous Price Target 260 Change 0.0% Key Data ACEM IN Current Market Price Market cap (bn) INR237 INR470.0/US$7.0 Free Float 29% Shares in issue (mn) 1,985.7 Diluted share (mn) 1, mon avg daily val (mn) INR688.0/US$ week range 292/223 Sensex/Nifty 34,915/10,618 INR/US$ 66.9 Price Performance % 1M 6M 12M Absolute Relative* * To the BSE Sensex ACC-Ambuja MSA: ACC and Ambuja s Boards have approved the mutual sale and purchase of materials/services through a Master Supply Agreement (MSA). Management has revised the savings estimate from the MSA arrangement to 3-5% of FY17 PBT for both companies; this translates to savings of INR 790mn for Ambuja (c.inr 30/t CY18). Both companies have received shareholder approval for the agreement. The MSA, once implemented, would be valid for three years. Maintain HOLD: We value Ambuja s assets under operation at 12x EVE. We are incorporating an INR 10/share of value from its expansion potential, factoring in the execution risks. We arrive at a TP of INR 260/share and maintain HOLD. Financial Summary Net Sales 93,683 2,00,938 2,35,984 2,62,440 2,88,244 Sales Growth -5.5% 114.5% 17.4% 11.2% 9.8% EBITDA 15,315 31,812 38,576 42,911 51,428 EBITDA Margin 16.2% 15.8% 16.3% 16.1% 17.6% Adjusted Net Profit 8,631 11,437 15,164 17,621 22,425 Diluted EPS (INR) Diluted EPS Growth -34.7% 3.6% 32.6% 16.2% 27.3% ROIC 12.4% 10.0% 9.6% 11.6% 15.1% ROE 8.5% 7.6% 7.5% 8.4% 10.3% P/E (x) P/B (x) EV/EBITDA (x) Dividend Yield 1.2% 1.2% 1.2% 2.1% 2.1% Source: Company data, JM Financial. Note: Valuations as of 04/May/2018 JM Financial Research is also available on: Bloomberg - JMFR <GO>, Thomson Publisher & Reuters S&P Capital IQ and FactSet Please see Appendix I at the end of this report for Important Disclosures and Disclaimers and Research Analyst Certification. JM Financial Institutional Securities Limited
2 1Q CY14 2Q CY14 3Q CY14 4Q CY14 1Q CY15 2Q CY15 3Q CY15 4Q CY15 1Q CY16 2Q CY16 3Q CY16 4Q CY16 1Q CY17 2Q CY17 3Q CY17 4Q CY17 1Q CY18 1Q CY14 2Q CY14 3Q CY14 4Q CY14 1Q CY15 2Q CY15 3Q CY15 4Q CY15 1Q CY16 2Q CY16 3Q CY16 4Q CY16 1Q CY17 2Q CY17 3Q CY17 4Q CY17 1Q CY18 Ambuja Cement 4 May 2018 Exhibit 1. EBITDA/t improvement: realisation improvement more than offset the cost escalations EBITDA/t YoY flow (INR/t) EBITDA/t QoQ flow (INR/t) EBITDA/t LY Realn RM costs P & F Freight Staff cost Others EBITDA/t current EBITDA/t LQ Realn RM costs P & F Freight Staff cost Others EBITDA/t current EBITDA/t on adjusted basis Exhibit 2. Cement volume trends Volumes (mnt) % YoY Volume 17% 2% 7% -1% 3% 2% 1% 2% 9% 12% 3% 5% 3% -2% -10% -7%-10% Q CY14 2Q CY14 3Q CY14 4Q CY14 1Q CY15 2Q CY15 3Q CY15 4Q CY15 1Q CY16 2Q CY16 3Q CY16 4Q CY16 1Q CY17 2Q CY17 3Q CY17 4Q CY17 1Q CY18 20% 10% 0% -10% -20% -30% -40% -50% -60% -70% Exhibit 3. Realisation trends 6,000 5,500 5,000 4,500 4,000 3,500 3,000 2,500 8% 11% 6% 2% 3% Realisation (INR/t) % YoY Realisation 4% 3% 5% 4% 8% 8% 3% 2% -10% -6% -3% -9% 4,630 4,675 4,5384,385 4,465 4,5574,5694,551 4,353 4,190 4,285 4,245 4,336 4,4284,462 4,208 4,057 10% 0% -10% -20% -30% -40% -50% -60% Exhibit 4. EBITDA/t trends EBITDA (INR/t) , JM Financial Institutional Securities Limited Page 2
3 Exhibit 5. Results in brief 1Q CY18 1Q CY17 %YoY 4Q CY17 %QoQ CY18E CY17P %YoY Net sales 28,626 25, , ,14,921 1,04, Total expenditure 23,555 21, , ,366 85, EBITDA 5,071 3, , ,704 18, EBIDTA Margin (%) bps bps bps Other income 507 1, ,049 3, Interest (net) ,168 1, Depreciation 1,393 1, , ,986 5, PBT 3,928 3, , ,599 15, Tax 1, ,797 3, Effective tax rate (%) PAT (Adjusted) 2,718 2, , ,803 12, Exceptional items PAT (Reported) 2,718 2, , ,803 12, EPS (INR) Ambuja key operational metrics 1Q CY18 1Q CY17 %YoY 4Q CY17 %QoQ CY18E CY17P %YoY Cement Sales (mn tonnes) Realisation (INR/tonne) 4,551 4, , ,552 4, EBITDA INR/ tonne * DMF provision reversal of INR445mn Exhibit 6. Expense breakdown 1Q CY18 1Q CY17 %YoY 4Q CY17 %QoQ CY18E CY17P %YoY Raw materials 4,609 3, , ,355 15, INR/tonne Power & Fuel 6,351 5, , ,290 22, INR/tonne 1, , Change in stock , INR/tonne Freight & Fwdg 6,383 5, , ,533 22, INR/tonne 1, , Purchase of stock in trade INR/tonne Staff cost 1,696 1, , ,406 6, INR/tonne Other Expenditure 5,102 4, , ,655 19, INR/tonne Total Expenditure 23,555 21, , ,366 85, Cost per tonne (INR) 3,745 3, , ,738 3, JM Financial Institutional Securities Limited Page 3
4 Exhibit 7. Valuation charts EV/EBITDA 1-year forward EV/t (USD/t) EV/EBITDA EV/EBITDA 5 year average (16.1x) EV/EBITDA 10 year average (12.3x) EV/tonne (USD) EV/t 5 year average (USD154) EV/t 10 year average (USD144) May-08 May-09 May-10 May-11 May-12 May-13 May-14 May-15 May-16 May-17 May-18 May-08 May-09 May-10 May-11 May-12 May-13 May-14 May-15 May-16 May-17 May-18 JM Financial Institutional Securities Limited Page 4
5 Company background Ambuja Cement, a part of the Holcim Group, is the third-largest cement company in India with total capacity of 29.65MT (Clinker capacity of 17.7MTPA) under its control. It is one of the most profitable and innovative cement companies in India. It is the lowest cost producers of cement with focus on structurally sound markets of the North, West and East India. The company has five integrated cement manufacturing plants with 9 kilns and eight cement grinding units across the country. Key investment arguments Cumulative greenfield/brownfield expansion potential of c.14.3mtpa: With the existing clearances, Ambuja has 18.3MTPA of expansion potential. However, this is constrained by clinker availability, which drops it down to 14.3MTPA. Of the 14.3MTPA, 5 is greenfield potential concentrated in South India and 9.4 is brownfield expansion potential available in the North and East. Major brownfield potential of 4.5MTPA is available in the underconstruction plant at Marwar Mundwa. Historically, the company has been slow in executing expansion projects; it has added 2.3MTPA (c.8%) capacity since CY11. We are factoring in the execution risk on its expansion potential. Additionally, greenfield expansion in the South entails the risk of a newer market and saturation in the South/East markets (to enter the upcycle only by E). ACC-Ambuja merger deferred; MSA with ACC: The Boards of ACC and Ambuja announced that the companies will not pursue the proposed merger for the time being owing to some constraints on its implementation. The Boards have however approved the mutual sale and purchase of materials/services through an MSA. Earlier in 2013, the companies had indicated savings of INR 3.6bn-4.2bn on account of logistic optimisation. However, management has revised the savings estimate downward on MSA to 3-5% of PBT for both companies. This translates to a saving of INR 1.4bn on a consolidated basis. Clinker - a bottleneck for growth: Ambuja has added only 1.7MT capacity in the past three years and has limited capacity addition plans over the medium term, including a 1.7MTPA clinker greenfield unit at Marwar Mundwa (nascent stage). The company has been losing its capacity market share (declined from 9% in FY13 to 6.2% in FY18). With Ambuja's current clinker utilisation at 80%, the company's growth is contingent upon further expansion. With demand expected to rise materially in the near term, we see limited benefits accruing to Ambuja, as its clinker capacity is fully utilised over the next two years. Valuation and view We value Ambuja s assets under operation at 12x EVE. We are incorporating an INR 10/share of value from its expansion potential, factoring in the execution risks. We arrive at a TP of INR 260/share and maintain HOLD. Key risks to our call (1) Execution of capacity expansion would help Ambuja tap the demand uptick and remove clinker capacity constraints and (2) higher-than-expected price hikes will augur well for the company. Exhibit 8. Volumes, realisation and cost outlook CY15 CY16 CY17 CY18E CY19E Cement Sales (mn tonnes) YoY Growth (%) Cement Realisations (INR/tonne) 4,303 4,315 4,233 4,002 4,154 YoY Growth (%) Power & Fuel (INR/tonne) Freight (INR/tonne) Raw Material (INR/tonne) Cement EBIDTA (INR/tonne) JM Financial Institutional Securities Limited Page 5
6 Financial Tables (Consolidated) Income Statement Net Sales 93,683 2,00,938 2,35,984 2,62,440 2,88,244 Sales Growth -5.5% 114.5% 17.4% 11.2% 9.8% Other Operating Income ,100 4,489 Total Revenue 94,614 2,00,938 2,35,984 2,66,540 2,92,733 Cost of Goods Sold/Op. Exp 8,267 23,311 27,760 29,435 31,895 Personnel Cost 5,895 13,701 15,112 16,611 17,950 Other Expenses 65,137 1,32,114 1,54,536 1,77,583 1,91,460 EBITDA 15,315 31,812 38,576 42,911 51,428 EBITDA Margin 16.2% 15.8% 16.3% 16.1% 17.6% EBITDA Growth -20.6% 107.7% 21.3% 11.2% 19.8% Depn. & Amort. 6,257 14,609 12,195 12,560 12,894 EBIT 9,058 17,203 26,381 30,351 38,534 Other Income 3,582 4,679 3,226 3,982 4,600 Finance Cost 918 1,530 2,058 1,944 1,910 PBT before Excep. & Forex 11,722 20,351 27,550 32,389 41,224 Excep. & Forex Inc./Loss(-) PBT 11,722 20,351 27,550 32,389 41,224 Taxes 3,091 5,738 8,229 9,374 11,932 Extraordinary Inc./Loss(-) Assoc. Profit/Min. Int.(-) 0 3,177 4,158 5,394 6,867 Reported Net Profit 8,076 10,961 15,207 17,621 22,425 Adjusted Net Profit 8,631 11,437 15,164 17,621 22,425 Net Margin 9.1% 5.7% 6.4% 6.6% 7.7% Diluted Share Cap. (mn) 1, , , , ,985.7 Diluted EPS (INR) Diluted EPS Growth -34.7% 3.6% 32.6% 16.2% 27.3% Total Dividend + Tax 5,230 6,505 6,505 11,616 11,616 Dividend Per Share (INR) Cash Flow Statement Profit before Tax 11,722 19,950 27,550 32,389 41,224 Depn. & Amort. 6,257 14,632 12,195 12,560 12,894 Net Interest Exp. / Inc. (-) 918 1,405 2,058 1,944 1,910 Inc (-) / Dec in WCap ,513 10,486 5,042 4,322 Others ,379-3,226-3,982-4,600 Taxes Paid -3,091-5,972-8,229-9,374-11,932 Operating Cash Flow 15,528 28,151 40,834 38,579 43,818 Capex -6,169-8,853-7,925-12,637-12,637 Free Cash Flow 9,360 19,298 32,909 25,942 31,181 Inc (-) / Dec in Investments 1,457-35, Others 3,882 3,558 3,226 3,982 4,600 Investing Cash Flow ,988-4,482-8,654-8,037 Inc / Dec (-) in Capital Dividend + Tax thereon -8,941-8,736-6,505-11,616-11,616 Inc / Dec (-) in Loans Others -2, ,255-1,944-1,910 Financing Cash Flow -10,796-9,608-19,677-13,560-13,526 Inc / Dec (-) in Cash 3,903-22,445 16,676 16,365 22,255 Opening Cash Balance 24,581 68,085 45,640 62,316 78,680 Closing Cash Balance 28,484 45,640 62,316 78,680 1,00,936 Balance Sheet Shareholders Fund 1,03,069 1,98,209 2,06,722 2,12,727 2,23,536 Share Capital 3,104 3,971 3,971 3,971 3,971 Reserves & Surplus 99,965 1,94,238 2,02,751 2,08,756 2,19,564 Preference Share Capital Minority Interest 0 43,702 46,080 51,474 58,341 Total Loans Def. Tax Liab. / Assets (-) 5,649 10,153 11,392 11,392 11,392 Total - Equity & Liab. 1,08,951 2,52,064 2,64,194 2,75,593 2,93,269 Net Fixed Assets 65,062 2,19,924 2,15,654 2,15,731 2,15,474 Gross Fixed Assets 1,20,127 3,74,702 3,81,775 3,89,775 3,97,775 Intangible Assets Less: Depn. & Amort. 59,206 1,60,599 1,72,793 1,85,353 1,98,247 Capital WIP 4,141 5,820 6,672 11,309 15,945 Investments 22,261 1,748 1,531 1,531 1,531 Current Assets 54,297 1,06,566 1,37,819 1,58,573 1,84,591 Inventories 8,955 21,635 24,583 27,766 30,494 Sundry Debtors 2,864 9,241 9,315 10,521 11,555 Cash & Bank Balances 28,484 45,640 62,316 78,680 1,00,936 Loans & Advances 9,411 2,876 3,239 3,239 3,239 Other Current Assets 4,583 27,175 38,367 38,367 38,367 Current Liab. & Prov. 32,669 76,174 90,810 1,00,241 1,08,326 Current Liabilities 6,893 20,842 28,225 37,656 45,741 Provisions & Others 25,776 55,332 62,585 62,585 62,585 Net Current Assets 21,628 30,393 47,009 58,331 76,264 Total Assets 1,08,951 2,52,064 2,64,194 2,75,593 2,93,269 Dupont Analysis Net Margin 9.1% 5.7% 6.4% 6.6% 7.7% Asset Turnover (x) Leverage Factor (x) RoE 8.5% 7.6% 7.5% 8.4% 10.3% Key Ratios BV/Share (INR) ROIC 12.4% 10.0% 9.6% 11.6% 15.1% ROE 8.5% 7.6% 7.5% 8.4% 10.3% Net Debt/Equity (x) P/E (x) P/B (x) EV/EBITDA (x) EV/Sales (x) Debtor days Inventory days Creditor days JM Financial Institutional Securities Limited Page 6
7 History of Earnings Estimate and Target Price Date Recommendation Target Price % Chg. Recommendation History 28-Jul-15 Buy Oct-15 Buy Apr-16 Buy Nov-16 Buy May-17 Hold May-17 Hold Jul-17 Hold Oct-17 Hold Feb-18 Hold Apri-18 Hold JM Financial Institutional Securities Limited Page 7
8 APPENDIX I JM Financial Institutional Securities Limited (formerly known as JM Financial Securities Limi te d) Corporate Identity Number: U67100MH2017PLC Member of BSE Ltd., National Stock Exchange of India Ltd. and Metropolitan Stock Exchange of India Ltd. SEBI Registration Nos.: Stock Broker - INZ , Research Analyst INH Registered Office: 7th Floor, Cnergy, Appasaheb Marathe Marg, Prabhadevi, Mumbai , India. Board: Fax: jmfinancial.research@jmfl.com Compliance Officer: Mr. Sunny Shah Tel: sunny.shah@jmfl.com Definition of ratings Rating Meaning Buy Total expected returns of more than 15%. Total expected return includes dividend yields. Hold Price expected to move in the range of 10% downside to 15% upside from the current market price. 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4QCY2012 Result Update Cement February 11, 2013 ACC Performance Highlights Quarterly results (Standalone) Y/E Dec. (` cr) 4QCY2012 3QCY2012 % chg qoq 4QCY2011 % chg yoy Net sales 3,099 2,445 26.8 2,503
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More informationStill on track. Exhibit 1: ICT is on track for FY09E
Country: India Sector: Indian Education Diviya Nagarajan Diviya.Nagarajan@jmfinancial.in Tel: (91 22) 6630 3066 Subhashini Gurumurthy Subhashini.Gurumurthy@jmfinancial.in Tel: (91 22) 6630 3069 Price:
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23-Jul-15 23-Sep-15 23-Nov-15 23-Jan-16 23-Mar-16 23-May-16 23-Jul-16 23-Sep-16 23-Nov-16 23-Jan-17 23-Mar-17 23-May-17 23-Jul-17 23-Sep-17 23-Nov-17 23-Jan-18 23-Mar-18 23-May-18 23-Jul-18 Result Update
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Oct-17 v-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 BUY CMP (Rs) 190 Target Price (Rs) 247 Potential Upside 29.7% Sensex 33,349 Nifty 10,030 Key Stock data BSE Code
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