EQUITY February 27, 2009 RESULTS REVIEW Share Data Market Cap Rs. 96.6 bn Price Rs. 63.45 BSE Sensex 8,891.61 Reuters ABUJ.BO Bloomberg ACEM IN Avg. Volume (52 Week) 0.4 mn 52-Week High/Low Rs. 128.5/ 43.0 Shares Outstanding 1,522.6 mn Valuation Ratios (Consolidated) Year to 31 Dec 2009E 2010E EPS (Rs.) 6.1 4.8 +/- (%) (20.4%) (21.0%) PER (x) 10.3x 13.1x EV/ tonnes (Rs.) 5,022 4,756 EV/ EBITDA (x) 6.0x 6.9x Shareholding Pattern (%) Promoters 46 FIIs 22 Institutions 16 Public & Others 16 Relative Performance 150 120 Ambuja Cements Limited Sell Negatives lined up Ambuja Cements reported a healthy top-line growth of 10.7% yoy in CY08 primarily due to a higher-than-expected realisation rate, although the EBITDA margin and net profit were marginally lower than our estimates. Stock price run-up unsustainable: The upsurge in the stock s price over the last couple of months was driven by positive investor sentiment for the industry, created by strong despatch numbers in the last two months and the government s support to the industry in the form of excise duty cuts. However, we believe that this upsurge is unsustainable as demand cools off further due to the economic slowdown (reflected by the recent GDP data released) and coincides with capacity expansions in the industry, thereby leading to an excess supply scenario. Meanwhile, further potential upsides remain limited. Consequently, we have downgraded our rating on the stock from Hold to Sell. Falling demand to hit revenue growth: Demand for cement has started to moderate, though not as rapidly as we had anticipated earlier. With the economic crisis yet to bottom out, the demand for cement is expected to decline further. Reduced demand from the real estate as well as industrial sector is unlikely to gain significant support from the infrastructure sector. Consequently, we expect revenue to fall by 2.4% yoy in 2009 and increase in 2010 to 2008 levels as new capacities come on-stream. Pressure on margins to continue: Increasing supply and falling demand will put pressure on Ambuja s capacity utilisation and realisation rates, and thus impact the margins negatively. However, the Company may get some respite 90 60 30 0 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 ACEM Rebased BSE Index Key Figures (Standalone) after the 4.4 mt (million tonnes) clinker capacity expansion in 2009, which will mitigate its dependence on expensive outside clinker, and an increase in the captive power capacity. Moreover, the lag effect of the decline in raw material and power & fuel costs is likely to come through in the next few quarters. Hence, we expect the EBITDA margin to fall 350 bps yoy to 25.3% in CY09. Quarterly Data Q4'07 Q3'08 Q4'08 YoY% QoQ% CY07 CY08 YoY% (Figures in Rs. mn, except per share data) Net Sales 14,740 13,873 16,228 10.1% 17.0% 56,314 62,347 10.7% Adj. EBITDA 5,293 4,091 4,256 (19.6%) 4.0% 20,860 18,250 (12.5%) Adj. Net Profit 3,013 2,501 2,490 (17.4%) (0.5%) 14,000 11,828 (15.5%) Margins(%) EBITDA 35.9% 29.5% 26.2% 37.0% 29.3% NPM 20.4% 18.0% 15.3% 24.9% 19.0% Per Share Data (Rs.) Adj. EPS 1.98 1.64 1.63 (17.6%) (0.5%) 9.2 7.8 (15.5%) Please see the end of the report for disclaimer and disclosures. -1-
EQUITY February 27, 2009 Valuation: Ambuja s stock is currently trading at a price-to-book ratio of 1.60x. Our DCF-based fair value estimate of Rs. 51 reflects a potential downside of 20% from the current market price. We believe that the stock is overvalued at the current market price; hence, we have downgraded our rating from Hold to Sell. Result Highlights For the quarter ended December 2008, Ambuja Cements net sales increased 10.1% yoy to Rs. 16,228 mn. Net sales for the year increased by 10.7% yoy to Rs. 62,347 mn, driven by increased sales volume and realisation rates to 17.76 mt and Rs. 3,511 per tonne, respectively, by ~5.0% yoy each. EBITDA for Q4 08 declined by 19.6% yoy to Rs. 4,256 mn, while EBITDA for the year declined 12.5% yoy to Rs. 18,250 mn, hit by a jump in the cost of clinker purchased from outside and higher power & fuel costs. The Company s CY08 EBITDA margin plunged ~780 bps yoy to 29.3% during the year. The interest cost for the year declined 57.7% yoy to Rs. 321 mn, primarily due to debt repayment, while the interest coverage ratio doubled to an exorbitantly high 49.0x. The Company continues to maintain a high cash balance and a very low debt-equity ratio, which we believe is a major advantage in the currently challenging macroeconomic environment. Adjusted net profit for the quarter declined by 17.4% yoy to Rs. 2,490 mn, while that for CY08 declined by 15.5% yoy to Rs. 11,828 mn. Reported net profit for the year, which included exceptional items of Rs. 3,083 mn, fell 20.7% yoy to Rs. 14,023 mn. During the year, Ambuja changed its inventory valuation method from the annual weighted average method to daily moving weighted average for items procured and monthly moving average for materials in progress and finished goods. Consequently, the Company s profit for the year was higher by Rs. 834 mn. Please see the end of the report for disclaimer and disclosures. -2-
EQUITY February 27, 2009 Expansion Projects Ambuja Cements commissioned a 1.2 mt grinding plant at Surat, Gujarat, and an 18.7 MW captive power plant (CPP) in Rabriyawas, Rajasthan, during the year. Its expansion plans are largely on track and a significant amount of the planned CAPEX of Rs. 35 bn is likely to be incurred by 2009. The cash-rich Company is unlikely to see the need to raise debt for the same. Around 4.4 mt would be added to the Company s clinker capacity in 2009, and ~4.0 mt to the grinding capacity by 2010. The Company is also setting up captive power plants at multiple locations, with a total capacity of 90 MW. The bulk cement terminal at Kochi is on course for completion in Q1 09. Ambuja also plans to expand its fleet of ships by acquiring 3 new vessels over the next two years, in order to increase its reach in the South India market through the sea route. Type of Plant Location Capacity Expected Completion Clinker Expansion Project Bhatapara (Chattisgarh) 2.2 mtpa Mid 2009 Clinker Expansion Project Rauri (HP) 2.2 mtpa End 2009 Captive Power Plants Multiple locations 90 MW 2009, 2010 Cement Grinding Unit Dadri (UP) 1.5 mtpa End 2009/2010 Cement Grinding Unit Nalagarh (HP) 1.5 mtpa End 2009/2010 Bulk Cement Terminal Kochi Q1'09 Outlook We believe that the cement industry is heading towards challenging times. The fall in GDP growth and the slowdown in the real estate sector (which accounts for 55 60% of the cement demand) are likely to pull down the cement demand further. Meanwhile, the industry plans to add 50 60 mt of capacity over the next two years, which is likely to result in an over-supply situation, although the deferment in capacity expansions by cement Please see the end of the report for disclaimer and disclosures. -3-
EQUITY February 27, 2009 companies should push the excess supply scenario from the earlier anticipated H2 09 to H1 10. The double whammy of softening demand and increasing supply is likely to compel the Company to bring down its capacity utilisation rate to 78 80% in CY10. However, seeing the recent trends, the effect of the demand-supply equation is not as severe on cement prices. This we feel is primarily due to the consolidated nature of the industry and the consequent strength of the cement players to resist price declines. The decline in the capacity utilisation rate would increase the Company s fixed cost burden, thus negatively impacting the margins. Moreover, the reducing coal linkages, which now stand at ~45%, would compel the Company to procure coal at an expensive rate either through e-auction or import. However, the Company is increasing its captive power capacity further by 90 MW (~30%) to ~400 MW; this would help meet almost all its power needs from internal generation in the next couple of years, thus giving it the benefit of a price differential of Re. 1.0 per kwh. This, along with the fall in the raw material and power & fuel costs from their peaks, is likely to provide some support to the Company s margins. Valuation Ambuja s stock is trading at a forward P/E of 10.3x for CY09 and a price-tobook ratio of 1.6x. We estimate the average ROE of the Company over the next two years at 13%, compared with 24% in the previous two years. We have valued the stock by using the DCF methodology, assuming a WACC of 13.9% and a terminal growth rate of 5.0%. Our fair value estimate of Rs. 51 reflects a 20% downside from the current market price. Hence, we have downgraded our rating from Hold to Sell. Please see the end of the report for disclaimer and disclosures. -4-
EQUITY February 27, 2009 Key Figures (Consolidated) Year to December CY06 CY07 CY08 CY09E CY10E CAGR (%) (Figures in Rs. mn, except per share data) (CY08-10E) Sales Vol (mn tonnes) 16.3 16.9 17.8 18.6 19.7 5.2% Net Sales 49,320 57,186 62,618 61,088 62,572 (0.0%) Adj. EBITDA 17,637 20,729 18,069 15,479 13,597 (13.3%) Adj. Net Profit 14,100 13,274 11,744 9,343 7,385 (20.7%) Margins(%) EBITDA 35.8% 36.2% 28.9% 25.3% 21.7% NPM 28.6% 23.2% 18.8% 15.3% 11.8% Per Share Data (Rs.) Adj. EPS 9.3 8.7 7.7 6.1 4.8 (20.7%) PER (x) 15.2x 16.9x 8.2x 10.3x 13.1x Sensitivity Analysis of the Fair Value Estimate DCF Sensitivity Analysis Cost of Capital (WACC) 50.9 12.9% 13.4% 13.9% 14.4% 14.9% 4.0% 52 51 49 48 47 4.5% 53 51 50 49 47 5.0% 54 52 51 49 48 5.5% 56 54 52 50 49 6.0% 57 55 53 51 50 Source: Indiabulls research Terminal growth Please see the end of the report for disclaimer and disclosures. -5-
EQUITY February 27, 2009 Disclaimer This report is not for public distribution and is only for private circulation and use. The Report should not be reproduced or redistributed to any other person or person(s) in any form. No action is solicited on the basis of the contents of this report. This material is for the general information of the authorized recipient, and we are not soliciting any action based upon it. This report is not to be considered as an offer to sell or the solicitation of an offer to buy any stock or derivative in any jurisdiction where such an offer or solicitation would be illegal. It is for the general information of clients of Indiabulls Securities Limited. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. You are advised to independently evaluate the investments and strategies discussed herein and also seek the advice of your financial adviser. Past performance is not a guide for future performance. The value of, and income from investments may vary because of changes in the macro and micro economic conditions. Past performance is not necessarily a guide to future performance. This report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such. Any opinions expressed here in reflect judgments at this date and are subject to change without notice. Indiabulls Securities Limited (ISL) and any/all of its group companies or directors or employees reserves its right to suspend the publication of this Report and are not under any obligation to tell you when opinions or information in this report change. In addition, ISL has no obligation to continue to publish reports on all the stocks currently under its coverage or to notify you in the event it terminates its coverage. Neither Indiabulls Securities Limited nor any of its affiliates, associates, directors or employees shall in any way be responsible for any loss or damage that may arise to any person from any error in the information contained in this report. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject stock and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. No part of this material may be duplicated in any form and/or redistributed without Indiabulls Securities Limited prior written consent. The information given herein should be treated as only factor, while making investment decision. The report does not provide individually tailor-made investment advice. Indiabulls Securities Limited recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. Indiabulls Securities Limited shall not be responsible for any transaction conducted based on the information given in this report, which is in violation of rules and regulations of National Stock Exchange or Bombay Stock Exchange. Indiabulls (H.O.), Plot No- 448-451, Udyog Vihar, Phase - V, Gurgaon - 122 001, Haryana. Ph: (0124) 3989555, 3989666-6-