4QCY2009 Result Update I Cement February 6, 2010 Ambuja Cements Performance Highlights Ambuja Cements (Ambuja) posted a healthy 13.5% growth in its Top-line during CY2009, which was in-line with our estimates. The growth in the Top-line was on account of a 6% increase in sale volumes and better realisations. However, the OPM was flat, on account of a substantial increase in raw material costs (higher costs of clinker purchased). On the Bottom-line front, the net profit was down by 13.1%, primarily on account of an extraordinary income of Rs308.3cr reported in CY2008. After the results, we have revised our EPS estimate for CY2010E downwards from Rs 7.6 to Rs6.3. The stock trades at an EV/EBITDA of 7.1x and at an EV/tonne of US $106/tonne, according to its CY2011E estimates. We maintain our Neutral recommendation on the stock. Higher Depreciation and Taxation drag Bottom-line: Ambuja s net sales grew by 8.9% in 4QCY2009 to Rs1,787cr (Rs1,642cr). The growth on the top-line front was on account of a 2.2% increase in sales volume to 4.7mn tonnes (4.6mn tonnes), accompanied by a 3.0% increase in the realisations. The OPM for the quarter stood at 25.1% (24.7%), up by 36bp. However, the company s Net Profit declined by 3.4% to Rs240.6cr (Rs249.1cr) on account of the higher depreciation and tax expenses. The depreciation and tax expenses were up by 21.2% and 41.3%, respectively, during the quarter. Outlook and Valuation The stock trades at an EV/EBITDA of 7.1x and at an EV/tonne of US $106/tonne, according to its CY2011E estimates. On the valuation front, we have valued Ambuja Cements at an average of a Target EV/EBITDA of 7x and an EV/tonne of US $115/tonne) to arrive at a revised fair value of Rs101 (Rs107 earlier). We maintain our Neutral recommendation on the stock. NEUTRAL CMP Rs100 Target Price - Investment Period - Stock Info Sector Cement Market Cap (Rs cr) 15,237 Beta 0.6 52 WK High / Low 114/60 Avg. Daily Volume 701018 Face Value (Rs) 2 BSE Sensex 15,916 Nifty 4,757 Reuters Code ABUJ.BO Bloomberg Code ACEM@IN Shareholding Pattern (%) Promoters 46.4 MF/Banks/Indian FIs 18.3 FII/NRIs/OCBs 26.2 Indian Public 9.1 Abs. (%) 3m 1yr 3yr Sensex (1.5) 71.1 9.9 Ambuja 19.4 39.9 (29.9) Key Financials (Standalone) Y/E Dec (Rs cr) CY2008 CY2009 CY2010E CY2011E Net Sales 6,235 7,076 6,988 7,519 % chg 10.7 13.5 (1.3) 7.6 Adj. Net Profit 1,402 1,218 962 1,073 % chg (20.7) (13.1) (21.1) 11.6 OPM (%) 28.5 26.4 22.7 23.3 EPS (Rs) 9.2 8.0 6.3 7.0 P/E (x) 10.9 12.5 15.8 14.2 P/BV (x) 2.7 2.3 2.1 1.9 RoE (%) 27.1 20.0 14.0 14.1 RoCE (%) 24.5 18.2 13.0 13.2 EV/Sales (x) 2.1 1.8 1.8 1.6 EV/EBITDA (x) 7.4 7.0 8.1 7.1 Installed Cap. (mtpa) 22.0 23.5 25.0 27.0 Rupesh Sankhe Tel: 022 4040 3800 Ext: 319 E-mail: rupeshd.sankhe@angeltrade.com V Srinivasan Tel: 022 4040 3800 Ext: 330 E-mail: v.srinivasan@angeltrade.com Please refer to important disclosures at the end of this report Sebi Registration No: INB 010996539 1
Operational Highlights We have estimated that the company s per tonne cement realisation was up by 3% yoy during the quarter, although it was down by 9.5% qoq. We have estimated the company s per tonne raw material costs to have gone up by a substantial 43.1% yoy, on account of the high cost of clinker purchased during the quarter. The company s operating profit per tonne stood at Rs946.2 during the quarter, up 7.2% yoy. Exhibit 1: Per tonne analysis (Rs) 4QCY09 3QCY09 4QCY08 yoy chg (%) qoq chg (%) Realisation/tonne 3,740.3 4,130.6 3,630.0 3.0 (9.5) Raw Material Cost/tonne 463.6 382.2 324.0 43.1 21.3 Power & Fuel Cost /tonne 691.5 1007.7 854.3 (19.1) (31.4) Freight & Forwarding Cost/tonne 799.5 792.8 672.2 18.9 0.8 Operating Profit/tonne 946.2 1040.9 882.5 7.2 (9.1) Depreciation/tonne 181.4 181.9 154.3 17.6 (0.3) Net Profit/tonne 507.5 638.7 541.5 (6.3) (20.5) Capacity Expansion projects Progressing well The company is in the process of expanding its clinker capacity by 4.4mtpa at Bhatapara and Rauri, by setting up clinker plants with a capacity of 2.2mn tonne each. The commissioning of these projects has begun, and they are expected to be on stream by 1QCY2010. The projects involving the setting-up of grinding units at Nalagarh and Dadri (with capacities of 1.5mn tonnes each) are progressing well and are expected to be completed by 1QCY2010. In addition to these projects, the company is also adding 2mn tonnes of total grinding capacity at Bhatapara and Maratha. The company expects its overall capacity to touch 27mn tonnes by the end of CY2010, after these additions. Ambuja is also setting up an additional 63MW of captive power, at Bhatapara (33MW) and at Ambujanagar (30MW, expected to be complete in 1QCY2010), which would take its overall captive power capacity beyond 400MW. Exhibit 2: Capacity ramp-up (mtpa) 30 25 22.0 23.5 25.0 27.0 20 18.5 15 10 5 0 CY2007 CY2008 CY2009 CY2010E CY2011E February 6, 2010 2
Exhibit 3: 4QCY2009 Performance (Standalone) Y/E March (Rs cr) 4QCY09 4QCY08 % Chg CY09 CY08 % Chg Net Sales 1,787.5 1,641.7 8.9 7,076.5 6,234.7 13.5 Net Raw Material Costs 219.8 120.1 83.1 1,013.9 519.3 95.3 (% of Sales) 12.3 7.3 14.1 8.3 Power & Fuel 327.8 393.0 (16.6) 1,422.8 1,325.7 7.3 (% of Sales) 18.3 23.9 19.8 21.1 Staff Costs 78.3 70.9 10.5 272.8 266.1 2.5 (% of Sales) 4.4 4.3 3.8 4.2 Freight & Forwarding 378.9 338.2 12.0 1,347.4 1,250.0 7.8 (% of Sales) 21.2 20.6 18.8 19.9 Other Expenses 334.2 313.7 6.5 1,153.1 1,117.0 3.2 (% of Sales) 18.7 19.1 16.1 17.8 Total Expenditure 1,339.0 1,235.8 8.4 5,210.0 4,478.0 16.3 Operating Profit 448.5 405.9 10.5 1,868.2 1,776.9 5.1 OPM 25.1 24.7 26.4 28.5 Interest 6.7 14.8 (54.4) 22.4 32.1 (30.0) Depreciation 86.0 71.0 21.2 297.0 259.8 14.3 Other Income 40.8 39.3 3.8 255.7 196.8 1.2 PBT (excl. Extr. Items) 396.6 359.5 10.3 1,803.3 1,661.4 8.5 Extr. Income/(Expense) 308.3 PBT (incl. Extr. Items) 396.6 359.5 10.3 1,803.3 1,969.8 (8.5) Provision for Taxation 156.0 110.5 41.3 584.9 567.6 3.1 (% of PBT) 39.3 30.7 32.4 28.8 Reported PAT 240.6 249.1 (3.4) 1,218.4 1,402.2 (13.1) PATM 13.5 15.2 17.0 22.3 EPS (Rs) 1.6 1.6 8.0 9.2 February 6, 2010 3
Outlook and Valuation Despite the additional capacity coming on stream, capacity utilisation remained strong and absorbed the excess capacity (with the exception of the southern region). Additionally, there was a hike in prices across the country, due to a strong rebound in demand, wagon unavailability and logistical issues. The total cement capacity in India stood at around 219.2mtpa at the end of FY2009, an increase of 21mtpa yoy. Additionally, the capacity is expected to have been augmented by 30mn tonnes in 9MFY2010. We expect these additional capacities to fully ramp-up over the next 3-4 months, which would eventually exert pressure on cement prices. Overall, we expect the industry to add around 76mn tonnes of capacity through FY2010-12E. Such huge capacity additions would eventually result in an oversupply situation in the market, while demand is not expected to keep pace with the supply. All the frontline states in the southern region, like Andhra Pradesh, Tamil Nadu and Karnataka, are witnessing low demand or a fall therein, which is a cause for concern. Most of the capacities that are being expanded are in the southern region; thus, the industry is witnessing aggressive inter-regional stock movement, which pressurises the pricing power and profitability in other regions as well. In the northern market, the capacity utilisation remained healthy at 99% in December 2009, due to the Commonwealth games-related spending. The cement prices rose across india due to strong demand and distribution constraints (due to a shortage in the availability of rail wagons). We expect prices to remain stable over the next few months. However, the rise in prices is expected to be a short-term trend, as the new capacity addition over the last few months is expected to exert pressure, going ahead. Exhibit 4: Valuation based on EV/EBITDA multiple and Asset Replacement (CY11E) Target EV/EBITDA (x) 7 Target EV/tonne (US $) 115 EV (Rs cr) 12,285 EV (Rs cr) 13,369 Market Cap (Rs cr) 15,136 Market Cap (Rs cr) 15,525 No. of shares(cr) 152.2 No. of shares (cr) 152.2 Fair Price (Rs) 99 Fair Price (Rs) 102 On the valuation front, we have valued Ambuja Cements at an average of a Target EV/EBITDA of 7x and an EV/tonne of US $115/tonne, to arrive at a revised fair value of Rs101 (Rs107 earlier). The stock trades at an EV/EBITDA of 7.1x and at an EV/tonne of US $106/tonne, according to its CY2011E estimates. We maintain our Neutral recommendation on the stock. February 6, 2010 4
Exhibit 5: Two-year forward EV/Ebitda band Exhibit 6: Two-year forward EV/tonne (US $) band 30,000 25,000 EV (Rs cr) 20,000 15,000 10,000 5,000 130 110 90 70 0 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 February 6, 2010 5
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