2QCY2012 Result Update Cement Ambuja Cements Performance Highlights Quarterly results (Standalone) Y/E Dec. (` cr) 2QCY2012 1QCY2012 % chg qoq 2QCY2011 % chg yoy Net Sales 2,566 2,633 (2.6) 2,173 18.1 Operating profit 735 772 (4.8) 598 22.8 OPM (%) 28.5 29.0 (52)bp 27.3 116bp Rep. Net Profit 469 312 50.2 348 34.9 During 2QCY2012, Ambuja Cements (ACEM) posted a strong 34.9% yoy improvement in its bottom-line on account of a healthy 10% yoy improvement in realization (up 8.7% qoq). The volumes too rose by 7.4% yoy. OPM at 28.5%, up 116bp yoy: Ambuja Cements standalone top-line grew by 17.9% yoy to `2,566cr aided by a 7.3% growth in volumes and 10.0% growth in realization. The growth in volume was on account of a healthy demand in the company s key markets in the northern region and higher capacity operation (y-o-y) by the company. Despite a strong realization growth on a y-o-y basis, the OPM rose only by a modest 116bp due to an increase in the operating costs. The company s per tonne operating cost was higher by 8% yoy with the raw material and freight & forwarding costs going up by 19.7% and 9.8% respectively on a per tonne basis. Outlook and valuation: We expect Ambuja Cements to register a 16.5% and 22.6% CAGR in its top-line and bottom-line respectively over CY2011-13E, mainly aided by a 9.9% CAGR in volumes. At the current market price, the stock is trading at a rich valuation with an EV/tonne of US$152 on CY2013E capacity, which we believe factors in the positives of a favorable locational presence. Hence, we continue to remain Neutral on the stock. Key financials (Standalone) Y/E Dec. (` cr) CY2010 CY2011 CY2012E CY2013E Net sales 7,390 8,514 10,116 11,550 % chg 4.4 15.2 18.8 14.2 Adj. net profit 1,237 1,253 1,662 1,846 % chg 1.5 1.3 32.7 11.1 OPM (%) 26.4 23.4 24.6 24.2 FDEPS (`) 8.1 8.2 10.8 12.0 P/E (x) 22.7 22.5 16.9 15.3 P/BV (x) 3.8 3.9 3.5 3.2 RoE (%) 17.9 16.3 19.7 19.8 RoCE (%) 20.8 18.6 21.8 22.9 EV/Sales 3.4 3.0 2.4 2.0 EV/tonne (US$) 209 179 158 152 Installed capacity (mtpa) 25 27 27 27 EV/EBITDA (x) 13.1 12.7 9.7 8.2 NEUTRAL CMP `184 Target Price - Investment Period - Stock Info Sector Cement Market Cap (` cr) 28,251 Net Debt (` cr) Bloomberg Code (3,243) Beta 0.8 52 Week High / Low 186/120 Avg. Daily Volume 337,744 Face Value (`) 2 BSE Sensex 17,224 Nifty 5,228 Reuters Code ABUJ.BO ACEM@IN Shareholding Pattern (%) Promoters 50.2 MF / Banks / Indian Fls 12.4 FII / NRIs / OCBs 27.3 Indian Public / Others 10.1 Abs. (%) 3m 1yr 3yr Sensex (0.4) (4.9) 9.9 ACEM 23.6 43.0 68.9 V Srinivasan 022-39357800 Ext 6831 v.srinivasan@angelbroking.com August 2, 2012 Please refer to important disclosures at the end of this report 1
Exhibit 1: 2QCY2012 performance (Standalone) Y/E Dec. (` cr) 2QCY12 1QCY12 % chg qoq 2QCY11 % chg yoy 1HCY12 1HCY11 % chg Net sales 2,566 2,633 (2.6) 2,173 18.1 5,199 4,389 18.5 Other operating income 13 28 (54.7) 16 (20.9) 33 23 44.9 Total operating income 2578 2661 (3.1) 2189 17.8 5,232 4,412 18.6 Net raw-material costs 116 165 (29.8) 26 342.6 281 155 82.1 (% of sales) 4.5 6.3 1.2 5.4 3.5 Power & fuel 599 627 (4.4) 563 6.3 1,226 1,045 17.3 (% of sales) 23.3 23.8 25.9 23.6 23.8 Staff costs 124 103 20.1 110 12.5 227 205 10.9 (% of sales) 4.8 3.9 5.1 4.4 4.7 Freight & forwarding 587 602 (2.4) 498 17.9 1,189 1,007 18.1 (% of sales) 22.9 22.8 22.9 22.9 22.9 Other expenses 418 392 6.6 393 6.2 808 776 4.2 (% of sales) 16.3 14.9 18.1 15.5 17.7 Total expenditure 1,844 1,889 (2.4) 1,591 15.9 3,731 3,187 17.1 Operating profit 735 772 (4.8) 598 22.8 1,501 1,225 22.5 OPM (%) 28.5 29.0 (52)bp 27.3 116bp 28.7 27.8 92bp Interest 18 17 7.4 15 18.8 35 29 20.2 Depreciation 122 121 0.5 107 13.2 242 213 13.5 Other income 78 87 (10.1) 56 39.5 171 108 57.9 Exceptional Inc./(Exp.) - 279-279 PBT 674 442 52.3 532 26.6 1,116 1,091 2.3 Provision for taxation 205 130 57.3 185 10.9 335 336 (0.4) (% of PBT) 30.4 29.4 34.7 30.0 30.8 Reported PAT 469 312 50.2 348 34.9 781 755 3.5 PATM (%) 18.3 11.9 642bp 16.0 228bp 15.0 17.2 (218)bp EPS (`) 3.1 2.0 50.2 2.3 34.9 5.1 5.0 3.5 Exhibit 2: Financial performance 3,000 2,633 2,566 35.0 2,500 2,000 2,207 2,173 1805 2329 30.0 (` cr) 1,500 25.0 (%) 1,000 500 407 348 171 302 312 469 20.0 0 1QCY11 2QCY11 3QCY11 4QCY11 1QCY12 2QCY12 Net Sales Net Profit OPM (RHS) 15.0 August 2, 2012 2
Exhibit 3: 2QCY2012 Actual vs. Angel estimates (` cr) Actual Estimates Variation (%) Net sales 2,566 2,500 2.6 Operating profit 735 794 (7.4) OPM (%) 28.5 31.8 (330)bp Net profit 469 511 (8.2) Performance highlights Higher realization drives top-line growth Ambuja Cements posted an 18.1% yoy growth in its net sales to `2,566cr during 2QCY2012, aided by a reasonable 10% yoy growth in realization to `4,632 per tonne and a moderate 7.4% yoy volume growth to 5.54mn tonne. The realization was higher by 8.7% even on a sequential basis as prices rose on the back of a healthy demand scenario. The volume growth was moderate on account of a higher y-o-y capacity as the company commissioned two cement mills - one at the Bhatapara plant in Chhattisgarh and the other at Maratha Cement Works in Maharashtra, which increased the company s total grinding capacity to ~27mn tonne. Realizations lead to marginal expansion in OPM on y-o-y basis Despite a strong growth in realization on a Y-o-Y basis, the OPM rose only by a modest 116bp due to an increase in the operating costs. The company s per tonne operating cost was higher by 8% yoy with the raw material and freight & forwarding costs going up by 19.7% and 9.8% respectively on a per tonne basis. Per tonne analysis For 2QCY2012, Ambuja Cement s realization/tonne improved strongly by 10.0% yoy and 8.7% qoq to `4,632. The power and fuel expenses/tonne increased by 18.7% yoy and 22.4% qoq to `1,014. The freight cost/tonne also rose by 9.8% yoy and 8.9% qoq to `1,060 due to higher petroleum products costs and railway freight charges. The operating profit/tonne stood at `1,304, higher by 15.5% yoy. Exhibit 4: Per tonne analysis (`) 2QCY12 1QCY12 2QCY11 % chg (yoy) % chg (qoq) Realization/tone 4,632 4,260 4,212 10.0 8.7 Net raw-material cost/tonne 335 247 280 19.7 36.0 Power and fuel cost/tonne 1,081 1,014 1,092 (0.9) 6.6 Freight cost/tonne 1,060 973 965 9.8 8.9 Other costs/tonne 754 634 762 (1.1) 18.9 Operating profit/tonne 1,304 1,204 1,129 15.5 8.3 August 2, 2012 3
Investment rationale Most favorable capacity location among cement majors Ambuja Cements has 81% of its total capacity located in states where the supply is either less than demand or there s an opportunity of diverting excess supply to nearby supply-deficit states. Logically, capacities in these states are expected to report relatively high utilization and margins. Capacity addition to aid volume growth During the past two years, Ambuja Cements added ~5mtpa of grinding capacities at various locations to reach its current overall capacity of ~27mtpa. Going ahead, we expect these capacity expansions to drive the company s volume growth. New clinker capacities to aid margin expansion Stabilization of production at the company's new clinker plants with capacity of 2.2mtpa each at Bhatapara and Rauri has resulted in elimination of external high-cost clinker purchase. Outlook and valuation We expect Ambuja Cements to register a 16.5% and 22.6% CAGR in its top-line and bottom-line respectively over CY2011-13E, mainly aided by a 9.9% CAGR in volumes. At the current market price, the stock is trading at rich valuations of EV/tonne of US$152 on CY2013E capacity, which we believe factors in the positives of a favorable locational presence. Hence, we continue to remain Neutral on the stock. Exhibit 5: One-year forward EV/tonne EV (` mn) 300,000 250,000 200,000 150,000 100,000 50,000 0 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 EV/tonne $120 $140 $160 $180 Source: BSE, Company, Angel Research August 2, 2012 4
Exhibit 6: Recommendation summary Company Reco CMP Tgt. Price Upside FY2014E FY2014E FY2012-14E FY2014E EV/tonne^ (`) (`) (%) P/BV (x) P/E (x) EPS CAGR RoE (%) US $ ACC* Neutral 1,317 - - 2.9 15.9 8.5 19.3 128 Ambuja Cements* Neutral 184 - - 3.2 15.3 21.4 19.8 162 India Cements Neutral 85 - - 0.7 7.5 8.5 9.5 52 JK Lakshmi Neutral 96 - - 0.8 5.7 37.6 14.0 42 Madras Cement Neutral 178 - - 1.6 10.3 3.1 16.2 67 Shree Cements Neutral 3,166 - - 3.3 14.1 67.7 26.0 114 UltraTech Cements Neutral 1,636 - - 2.6 15.2 9.9 18.3 160 ; Note: *Y/E December; ^ Computed on TTM basis Company Background Swiss cement major, Holcim acquired a controlling stake in Ambuja Cements in 2005. In India, the Holcim Group currently controls one-fifth of the total cement capacity through Ambuja Cements and ACC. On a standalone basis, Ambuja Cements is the third largest cement player in India with a total capacity of 27mtpa. The company majorly focuses on northern and western India, with no plants in southern India. Of its current total capacity, 40% capacity is in western India, 38% in northern India, 16% in eastern and north-eastern India and 6% in central India. August 2, 2012 5
Profit & loss statement (Standalone) Y/E Dec. (` cr) CY08 CY09 CY10 CY11 CY12E CY13E Total operating income 6,168 7,181 7,518 8,603 10,205 11,659 % chg 9.5 16.4 4.7 14.4 18.6 14.2 Total Expenditure 4,461 5,210 5,567 6,608 7,715 8,865 Net Raw Materials 519 1,014 542 634 712 843 Other Mfg costs 1,326 1,423 1,697 2,006 2,227 2,510 Personnel 266 273 344 433 477 529 Other 2,350 2,501 2,984 3,535 4,300 4,983 EBITDA 1,707 1,971 1,951 1,994 2,490 2,794 % chg (16.5) 15.5 (1.0) 2.2 24.8 12.2 (% of Net Sales) 27.7 27.9 26.4 23.4 24.6 24.2 Depreciation & Amortization 260 297 387 445 496 507 EBIT 1,447 1,674 1,564 1,549 1,994 2,287 % chg (20.0) 15.7 (6.6) (0.9) 28.7 14.7 (% of Net Sales) 23.5 23.7 21.2 18.2 19.7 19.8 Interest & other Charges 32 22 49 53 40 35 Other Income 246 151 120 230 301 386 (% of PBT) 15 8 7 13 13 15 Recurring PBT 1,662 1,803 1,635 1,727 2,255 2,637 % chg (13.7) 8.5 (9.3) 5.6 30.6 16.9 Extraordinary Expense/(Inc.) (308) - (27) 24 279 - PBT (reported) 1,970 1,803 1,662 1,703 1,976 2,637 Tax 568 585 398 474 593 791 (% of PBT) 28.8 32.4 24.0 27.8 30.0 30.0 PAT (reported) 1,402 1,218 1,264 1,229 1,383 1,846 ADJ. PAT 1,183 1,218 1,237 1,253 1,662 1,846 % chg (5.9) 3.0 1.5 1.3 32.7 11.1 (% of Net Sales) 19.2 17.2 16.7 14.7 16.4 16.0 Basic EPS (`) 7.8 8.0 8.1 8.2 10.8 12.0 Fully Diluted EPS (`) 7.8 8.0 8.1 8.2 10.8 12.0 % chg (5.9) 2.9 1.1 1.0 32.7 11.1 August 2, 2012 6
Balance sheet (Standalone) Y/E Dec. (` cr) CY08 CY09 CY10 CY11 CY12E CY13E SOURCES OF FUNDS Equity Share Capital 305 305 307 339 339 339 Preference Capital - - - - - - Reserves & Surplus 5,368 6,166 7,023 7,730 8,472 9,462 Shareholders Funds 5,673 6,471 7,330 8,069 8,811 9,801 Total Loans 289 166 65 49 49 49 Deferred Tax Liability 381 486 531 644 644 644 Total Liabilities 6,342 7,122 7,926 8,762 9,504 10,494 APPLICATION OF FUNDS Gross Block 5,707 6,224 8,779 9,702 9,934 10,169 Less: Acc. Depreciation 2,514 2,784 3,151 3,516 4,011 4,519 Net Block 3,193 3,440 5,628 6,186 5,923 5,651 Capital Work-in-Progress 1,947 2,714 931 532 785 1,543 Goodwill - - - - - - Investments 332 727 626 864 914 914 Current Assets 2,339 1,979 3,135 3,874 5,024 5,930 Cash 852 881 1,648 2,116 2,944 3,513 Loans & Advances 300 253 441 568 616 680 Other 1,188 846 1,047 1,189 1,464 1,737 Current liabilities 1,474 1,741 2,394 2,694 3,142 3,545 Net Current Assets 865 238 741 1,179 1,882 2,385 Misc. Exp. not written off 4 3 0 0 0 0 Total Assets 6,342 7,122 7,926 8,762 9,504 10,494 August 2, 2012 7
Cash flow statement (Standalone) Y/E Dec. (` cr) CY08 CY09 CY10 CY11 CY12E CY13E Profit before tax 1,970 1,803 1,662 1,703 1,976 2,637 Depreciation 260 297 387 445 496 507 Change in WC (252) 698 257 (51) 125 66 Interest expenses 32 22 49 53 40 35 Less: Other income 246 151 120 230 301 386 Direct taxes paid 568 585 398 474 593 791 Cash Flow from Operations 1,196 2,085 1,836 1,445 1,743 2,068 (Inc)/ Dec in Fixed Assets (1,726) (1,284) (771) (525) (485) (993) (Inc)/ Dec in Investments 957 (395) 101 (238) (50) - Other income 246 151 120 230 301 386 Cash Flow from Investing (523) (1,528) (550) (533) (234) (607) Issue of Equity 1 8 55 30 - - Inc./(Dec.) in loans (42) (123) (101) (16) - - Dividend Paid (Incl. Tax) 390 390 425 570 641 856 Others 32 22 49 (111) 40 35 Cash Flow from Financing (463) (528) (519) (444) (681) (891) Inc./(Dec.) in Cash 209 29 767 468 827 570 Opening Cash balances 643 852 881 1,648 2,116 2,944 Closing Cash balances 852 881 1,648 2,116 2,944 3,514 August 2, 2012 8
Key ratios Y/E Dec. CY08 CY09 CY10 CY11 CY12E CY13E Valuation Ratio (x) P/E (on FDEPS) 23.6 23.0 22.7 22.5 16.9 15.3 P/CEPS 16.8 18.5 17.1 18.6 16.6 13.2 P/BV 4.9 4.3 3.8 3.9 3.5 3.2 Dividend yield (%) 1.2 1.3 1.4 1.7 2.0 2.6 EV/Sales 4.1 3.4 3.4 3.0 2.4 2.0 EV/EBITDA 14.9 12.3 13.1 12.7 9.7 8.2 EV / Total Assets 4.0 3.4 3.2 2.9 2.5 2.2 Per Share Data (`) EPS (Basic) 7.8 8.0 8.1 8.2 10.8 12.0 EPS (fully diluted) 7.8 8.0 8.1 8.2 10.8 12.0 Cash EPS 10.9 9.9 10.7 9.9 11.1 13.9 DPS 2.2 2.4 2.6 3.2 3.6 4.8 Book Value 37.3 42.4 47.7 47.6 52.0 57.8 DuPont Analysis (%) EBIT margin 23.5 23.3 20.8 18.0 19.5 19.6 Tax retention ratio 71.2 67.6 76.0 72.2 70.0 70.0 Asset turnover (x) 1.2 1.2 1.2 1.3 1.5 1.7 ROIC (Post-tax) 20.2 19.3 19.0 17.3 21.1 23.6 Returns (%) ROCE (Pre-tax) 24.7 24.9 20.8 18.6 21.8 22.9 Angel ROIC (Pre-tax) 38.2 47.4 35.2 27.0 33.5 40.8 ROE 22.9 20.1 17.9 16.3 19.7 19.8 Turnover ratios (x) Asset Turnover (Gross Block) 1.1 1.2 1.0 0.9 1.0 1.2 Inventory / Sales (days) 45 41 38 39 37 38 Receivables (days) 11 10 7 8 10 11 Payables (days) 108 113 136 141 138 138 WC cycle (ex-cash) (days) (6) (16) (38) (39) (36) (34) Solvency ratios (x) Net debt to equity (0.1) (0.1) (0.2) (0.3) (0.3) (0.4) Net debt to EBITDA (0.3) (0.4) (0.8) (1.0) (1.2) (1.2) Interest Coverage (EBIT / Interest) 45.1 74.7 32.1 29.4 50.0 64.5 August 2, 2012 9
Research Team Tel: 022-3935 7800 E-mail: research@angelbroking.com Website: www.angelbroking.com DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report. Disclosure of Interest Statement Ambuja Cements 1. Analyst ownership of the stock No 2. Angel and its Group companies ownership of the stock No 3. Angel and its Group companies' Directors ownership of the stock No 4. Broking relationship with company covered No Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors. Ratings (Returns) : Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%) Reduce (-5% to 15%) Sell (< -15%) August 2, 2012 10