Ambuja Cements (ACEM IN) No structural issues realisation impact tones down earnings

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1 INSTITUTIONAL EQUITY RESEARCH Ambuja Cements (ACEM IN) No structural issues realisation impact tones down earnings INDIA CEMENT Quarterly Update Ambuja Cements (Ambuja) announced marginally lower than expected numbers in Q2CY15 largely driven by lower than expected realisations. Other operating parameters were largely in line. Ambuja has once again proved its cost competitiveness by delivering the best operating cost structure across all cement majors. Despite muted volume growth, opex/tonne at Ambuja declined by 1% qoq; 2% yoy. If it was not for realization fall, operating numbers at Ambuja would have been much better. We also believe and expect that Ambuja will have an upper hand in the overall scheme of rearrangement of operating subsidiaries of LafargeHolcim in India, given its better operating efficiencies. Possible merger / amalgamation with Lafarge India in the longer term also seems likely and in our opinion, will possibly rerate Ambuja valuations further. We maintain our BUY call on Ambuja with price target of Rs271 (+18%). Despite muted volumes, Ambuja proves once again on its cost competitiveness: Ambuja has been the only cement major in Q2CY15 to see a decline in its opex/tonne on both yoy and sequential basis despite a muted volume growth. Barring freight cost where we have seen a marginal increase of 2% yoy; 5% qoq, all other major cost heads of Ambuja have largely seen a decline. We do not see any major structural concern in the operating structure of Ambuja. Better realisations could have made all the difference: The only drag which we see in Q2CY15 earnings of Ambuja is its drop in realisation ( 9% yoy; 6% qoq). Ambuja reported an EBITDA/tonne of Rs 615 ( 37% yoy; 29% qoq). Lower realisations have impacted EBITDA/tonne by ~Rs276 at Ambuja. If we compare this with it sister concern, ACC s EBITDA/tonne drop ( 28% yoy; 36% qoq) was driven by 5% yoy; 2% qoq increase in operating cost. Its largest peer UltraTech was the only one to report a 5% increase in EBITDA/tonne driven by better volume growth and flattish cost structure (UltraTech s cost efficiencies were also remarkable in Q1FY16 and structurally getting close to Ambuja). Overall, we see Ambuja could have posted reasonably better numbers if its realisations would have been higher. Expect Ambuja to be LafargeHolcim s favorite in the whole scheme of consolidation: We expect Ambuja to remain the key beneficiary from the overall scheme of the restructuring of shareholding patterns by Holcim for its Indian subsidiaries. A possible and likely consolidation with Lafarge India in the longer term is also likely and this will add to the overall bargaining power of Ambuja within the cement industry. Ambuja, in our opinion, is LafargeHolcim s flagship for India and this is unlikely to change in the longer term as well. Maintain BUY with revised price target of Rs271 on CY16 earnings (Rs 313 earlier): Given that we have failed to see any material improvement in cement realisations in North & West India, we are cutting our realisation estimates for Ambuja by 6%. We continue to rate Ambuja a BUY with price target of Rs271. In case of a possibility of pick up in realisations in North & West India, Ambuja in our opinion will react most materially and we may see potential of price target upgrades here. On our current price target Ambuja will trade at US$181/ton on CY16E earnings. 29 July 215 BUY (Maintain) CMP RS 23 TARGET RS 271 (+18%) COMPANY DATA O/S SHARES (MN) : 1552 MARKET CAP (RSBN) : 373 MARKET CAP (USDBN) : WK HI/LO (RS) : 287 / 22 LIQUIDITY 3M (USDMN) : 6.4 PAR VALUE (RS) : 2 SHARE HOLDING PATTERN, % PROMOTERS : 5.3 FII / NRI : 33.4 FI / MF : 9.6 NON PROMOTER CORP. HOLDINGS : 1.6 PUBLIC & OTHERS : 8. PRICE PERFORMANCE, % 1MTH 3MTH 1YR ABS REL TO BSE PRICE VS. SENSEX Apr 13 Apr 14 Apr 15 Ambuja Cem Source: Phillip Capital India Research KEY FINANCIALS Rs mn CY14 CY15E CY16E Net Sales 99,35 231, ,414 EBIDTA 18,591 34,634 47,12 Net Profit 14,98 16,536 21,857 EPS, Rs PER, x EV/EBIDTA, x P/BV, x ROE, % Debt/Equity (%) Source: PhillipCapital India Research Est. Vaibhav Agarwal ( ) vagarwal@phillipcapital.in BSE Sensex Page 1 PHILLIPCAPITAL INDIA RESEARCH

2 Ambuja Cements Q2CY15 Results Rs mn Q2CY15 Q1CY15 QoQ Q2CY14 YoY Consensus Vs. Consensus Net Sales 24,928 24, % 27,64 7.9% 25,69 1% Cement volume, mtpa % % Net realisation, rs/tonne 4,19 4, % 4, % Total operating expenses 21,267 19, % 21,323.3% EBITDA 3,661 4, % 5, % 3,996 8% EBITDA margin 14.7% 19.4% 476bps 21.2% 653bps Other income 1,234 1, % 1, % Depreciation 1,485 1, % 1, % EBIT 3,41 4, % 6, % EBIT margin 13.7% 18.4% 477bps 22.2% 855bps Interest cost Profit before tax 3,94 4, % 5, % Total tax 831 1, % 1, % Tax rate 26.8% 25.4% 29.7% Adjusted profit after tax 2,264 3, % 4, % 2,627 14% Extraordinaries Reported profit after tax 2,264 3, % 4, % Adjusted EPS % % % Reported EPS % % Per Tonne Analysis Net realization 4,19 4,465 6% 4,626 9% Total expenditure 3,574 3,597 1% 3,645 2% Raw materials % 387 6% Stock adjustment Employee cost % 241 5% Power & fuel % 1,67 8% Freight 1,22 1,143 5% 1,18 2% Other expenditure % 86 2% EBITDA % % Source: Company, PhillipCapital India Research Page 2 PHILLIPCAPITAL INDIA RESEARCH

3 1yr forward band chart PE band PBV band Rs 24x 18x 12x 6x 45 Rs x 2x 1x MCap/Sales band EV/EBIDTA band 12 Rs mn x 2x 7 Rs mn x 9x 6x 4 1x EV/Sales band EV/ton 45 Rs mn x 2x 1x 7 Rs mn $ 15$ 1$ 5$ Source: PhillipCapital India Research Estimates Page 3 PHILLIPCAPITAL INDIA RESEARCH

4 Financials Income Statement Y/E Dec, Rs mn CY13 CY14 CY15e CY16e Net sales 91,18 99,35 231, ,414 Growth, % Total income 91,18 99,35 231, ,414 Raw material expenses 7,727 7,892 26,6 3,949 Employee expenses 5,87 6,22 14,66 17,213 Other Operating expenses 62,678 66, ,32 173,132 EBITDA (Core) 15,689 18,591 34,634 47,12 Growth, % (35.1) Margin, % Depreciation 4,937 5,13 11,614 13,14 EBIT 1,752 13,461 23,2 34,16 Growth, % (41.9) Margin, % Interest paid ,29 1,474 Other Non Operating Income 4,651 4,978 7,348 6,528 Pre tax profit 14,736 17,783 29,339 39,7 Tax provided 2,199 2,875 7,1 1,52 Profit after tax 12,538 14,98 22,338 29,17 Others (Minorities, Associates) 5,82 7,16 Net Profit 12,538 14,98 16,536 21,857 Growth, % (2.3) Net Profit (adjusted) 12,538 14,98 16,536 21,857 Unadj. shares (m) 1,546 1,55 1,983 1,983 Wtd avg shares (m) 1,544 1,548 1,983 1,983 Balance Sheet Y/E Dec, Rs mn CY13 CY14 CY15e CY16e Cash & bank 23,45 24,622 8,752 3,276 Debtors 2,351 2,317 6,969 7,36 Inventory 9,364 8,9 23,231 26,959 Loans & advances 2,714 3,12 17,86 17,311 Other current assets Total current assets 38,433 39,357 57,41 55,24 Investments 16,839 2,67 33,681 33,681 Gross fixed assets 117, , , ,917 Less: Depreciation 45,91 51,32 116,16 129,21 Add: Capital WIP 3,72 5,523 3, 25,1 Net fixed assets 74,29 78,758 18, ,78 Total assets 129, , ,91 274,629 Current liabilities 17,769 19,782 34,371 33,13 Provisions 11,19 12,96 17,157 16,385 Total current liabilities 28,788 31,878 51,527 49,488 Non current liabilities 6,149 6,199 26,154 15,17 Total liabilities 34,937 38,77 77,681 64,595 Paid up capital 3,92 3,1 3,966 3,966 Reserves & surplus 91,527 97,6 184, ,98 Shareholders equity 94,626 1,77 194,22 21,34 Total equity & liabilities 129, , ,91 274,629 *Numbers are consolidated with ACC CY15 onwards Source: Company, PhillipCapital India Research Estimates Cash Flow Y/E Dec, Rs mn CY13 CY14 CY15e CY16e Pre tax profit 14,736 17,783 29,339 39,7 Depreciation 4,937 5,13 11,614 13,14 Chg in working capital 4,544 3,339 14,274 5,346 Total tax paid 2,35 2,624 7,1 1,52 Other operating activities Cash flow from operating activities 22,183 23,629 19,677 36,776 Capital expenditure 14,482 9, ,667 18,1 Chg in investments 923 3,831 13,11 Other investing activities ,896 2,113 Cash flow from investing activities 14,837 13,257 44,782 15,888 Free cash flow 7,346 1,372 25,14 2,887 Equity raised/(repaid) Debt raised/(repaid) ,954 11,47 Dividend (incl. tax) 6,468 9,6 11,587 15,316 Cash flow from financing activities 6,497 9,199 9,234 26,362 Net chg in cash 849 1,173 15,87 5,475 Valuation Ratios CY13 CY14 CY15e CY16e Per Share data EPS (INR) Growth, % (2.6) 18.6 (13.4) 32.2 Book NAV/share (INR) FDEPS (INR) CEPS (INR) CFPS (INR) DPS (INR) Return ratios Return on assets (%) Return on equity (%) Return on capital employed (%) Turnover ratios Asset turnover (x) Sales/Total assets (x) Sales/Net FA (x) Working capital/sales (x) (.) (.1).1.1 Working capital days (11.2) (18.6) Liquidity ratios Current ratio (x) Quick ratio (x) Interest cover (x) Dividend cover (x) Total debt/equity (%) Net debt/equity (%) (42.) (44.7) (11.8) (14.1) Valuation PER (x) Price/Book (x) Yield (%) EV/Net sales (x) EV/EBITDA (x) EV/EBIT (x) Page 4 PHILLIPCAPITAL INDIA RESEARCH

5 Management Vineet Bhatnagar (Managing Director) (91 22) Kinshuk Bharti Tiwari (Head Institutional Equity) (91 22) Jignesh Shah (Head Equity Derivatives) (91 22) Research Automobiles Economics Midap Dhawal Doshi (9122) Anjali Verma (9122) Amol Rao (9122) Nitesh Sharma, CFA (9122) Infrastructure & IT Services Portfolio Strategy Banking, NBFCs Vibhor Singhal (9122) Anindya Bhowmik (9122) Manish Agarwalla (9122) Deepan Kapadia (9122) Pradeep Agrawal (9122) Technicals Paresh Jain (9122) Logistics, Transportation & Midcap Subodh Gupta, CMT (9122) Vikram Suryavanshi (9122) Consumer, Media, Telecom Production Manager Naveen Kulkarni, CFA, FRM (9122) Metals Ganesh Deorukhkar (9122) Jubil Jain (9122) Dhawal Doshi (9122) Manoj Behera (9122) Database Manager Oil&Gas, Agri Inputs Deepak Agarwal (9122) Cement Gauri Anand (9122) Vaibhav Agarwal (9122) Editor Pharma Roshan Sony Engineering, Capital Goods Surya Patra (9122) Ankur Sharma (9122) Mehul Sheth (9122) Sr. Manager Equities Support Hrishikesh Bhagat (9122) Rosie Ferns (9122) Sales & Distribution Corporate Communications Ashvin Patil (9122) Sales Trader Zarine Damania (9122) Shubhangi Agrawal (9122) Dilesh Doshi (9122) Kishor Binwal (9122) Suniil Pandit (9122) Sidharth Agrawal (9122) Execution Bhavin Shah (9122) Mayur Shah (9122) SINGAPORE Phillip Securities Pte Ltd 25 North Bridge Road, #6 Raffles City Tower, Singapore Tel : (65) Fax: (65) JAPAN Phillip Securities Japan, Ltd 4 2 Nihonbashi Kabutocho, Chuo ku Tokyo Tel: (81) Fax: (81) THAILAND Phillip Securities (Thailand) Public Co. Ltd. 15th Floor, Vorawat Building, 849 Silom Road, Silom, Bangrak, Bangkok 15 Thailand Tel (66) Fax: (66) UNITED STATES Phillip Futures Inc. 141 W Jackson Blvd Ste 35 The Chicago Board of Trade Building Chicago, IL 664 USA Tel (1) Fax: (1) Contact Information (Regional Member Companies) MALAYSIA Phillip Capital Management Sdn Bhd B 3 6 Block B Level 3, Megan Avenue II, No. 12, Jalan Yap Kwan Seng, 545 Kuala Lumpur Tel (6) Fax (6) INDONESIA PT Phillip Securities Indonesia ANZ Tower Level 23B, Jl Jend Sudirman Kav 33A, Jakarta 122, Indonesia Tel (62) Fax: (62) FRANCE King & Shaxson Capital Ltd. 3rd Floor, 35 Rue de la Bienfaisance 758 Paris France Tel (33) Fax : (33) AUSTRALIA PhillipCapital Australia Level 37, 53 Collins Street Melbourne, Victoria 3, Australia Tel: (61) Fax: (61) INDIA PhillipCapital (India) Private Limited No. 1, 18th Floor, Urmi Estate, 95 Ganpatrao Kadam Marg, Lower Parel West, Mumbai 413 Tel: (9122) Fax: (9122) HONG KONG Phillip Securities (HK) Ltd 11/F United Centre 95 Queensway Hong Kong Tel (852) Fax: (852) CHINA Phillip Financial Advisory (Shanghai) Co. Ltd. No 55 Yan An East Road, Ocean Tower Unit 2318 Shanghai 2 1 Tel (86) Fax: (86) UNITED KINGDOM King & Shaxson Ltd. 6th Floor, Candlewick House, 12 Cannon Street London, EC4N 6AS Tel (44) Fax: (44) SRI LANKA Asha Phillip Securities Limited Level 4, Millennium House, 46/58 Navam Mawatha, Colombo 2, Sri Lanka Tel: (94) Fax: (94) Page 5 PHILLIPCAPITAL INDIA RESEARCH

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