1QCY2011 Result Update Cement April 29, 2011 Ambuja Cements Performance Highlights Y/E Dec. (` cr) 1QCY2011 4QCY2010 % chg qoq 1QCY2010 % chg yoy Net sales 2,207 1,788 23.4 1,990 10.9 Operating profit 627 360 74.2 599 4.7 OPM (%) 28.2 19.7 852bp 29.7 (144)bp Net profit 407 258 57.9 462 (11.8) During 1QCY2011, Ambuja Cements (Ambuja) posted 10.9% yoy growth in its net sales to `2,207, aided by growth in volumes (up 6.8% yoy) and higher realisations (up 3.8% yoy). Realisations were higher during the quarter due to substantial price hikes in the northern and western region. At current levels, we believe the stock is fairly priced, owing to which we maintain our Neutral view on the stock. Bottom line down 11.8% yoy due to margin contraction and lower other income: For 1QCY2011, Ambuja posted 10.9% yoy growth in its net sales to `2,207cr. However, OPM for the quarter was lower by 144bp yoy to 28.2%, largely on account of a steep increase in power and fuel costs. On a positive note, raw-material costs declined by 44.9% yoy due to elimination of high-cost external clinker purchase. For 1QCY2011, Ambuja s net profit fell by 11.8% yoy to `407cr on account of higher depreciation costs and lower other income. Outlook and valuation: We expect cement prices to dip in the near term due to the onset of monsoons. The production discipline adopted by cement manufacturers is expected to weaken with upcoming capacities. Further, the full impact of the price hike carried out by Coal India is expected to be felt from 2QCY2011. We expect Ambuja s top line to register a 13.5% CAGR over CY2010 12, with dispatches expected to record a 9.3% CAGR on the back of capacity addition. At current levels, the stock is trading at fair valuations of 9.3x EV/EBITDA and EV/tonne of US$163 on CY2012 estimates. Hence, we maintain our Neutral view on the stock. NEUTRAL CMP `155 Target Price - Investment Period - Stock Info Sector Cement Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume 23,783 0.9 167/100 295857 Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code 2 19,136 5,750 ABUJ.BO ACEM@IN Shareholding Pattern (%) Promoters 46.3 MF / Banks / Indian Fls 15.7 FII / NRIs / OCBs 30.1 Indian Public / Others 7.9 Abs. (%) 3m 1yr 3yr Sensex 4.0 9.3 10.1 Ambuja Cement 21.4 25.2 35.3 Key financials (Standalone) Y/E Dec. ( ` cr) CY2009 CY2010 CY2011E CY2012E Net sales 7,077 7,390 8,463 9,617 % chg 14.7 4.4 14.5 13.6 Adj. net profit 1,218 1,237 1,172 1,291 % chg 11.4 1.5 (5.2) 10.1 OPM (%) 27.9 26.4 23.2 22.7 FDEPS (`) 8.0 8.2 7.6 8.4 P/E (x) 19.4 18.9 20.4 18.4 P/BV (x) 3.7 3.3 3.0 2.7 RoE (%) 20.1 17.9 15.2 15.2 RoCE (%) 24.9 20.8 18.0 14.4 EV/Sales 2.8 2.9 2.5 2.1 EV/tonne (US$) 188 185 170 163 Installed capacity (mtpa) 22 25 27 27 EV/EBITDA (x) 10.2 10.9 10.7 9.3 V Srinivasan 022-39357800 Ext 6831 v.srinivasan@angelbroking.com Please refer to important disclosures at the end of this report 1
Exhibit 1: 1QCY2011 performance Y/E Dec. (` cr) 1QCY11 4QCY10 % chg qoq 1QCY10 % chg yoy CY10 CY09 % chg Net sales 2,207 1,788 23.4 1,990 10.9 7,390 7,077 4.4 Other operating income 15.4 38.9 (60.3) 28.6 (46.1) 127.3 104.6 21.7 Total operating income 2222 1827 21.6 2019 10.1 7,518 7,181 4.7 Net raw-material costs 128.3 165 (22.4) 233 (44.9) 542 1,014 (46.5) (% of sales) 5.8 9.2 11.7 7.3 14.3 Power & fuel 481.6 446 8.0 355 35.6 1,697 1,423 19.3 (% of sales) 21.8 24.9 17.8 23.0 20.1 Staff costs 95 77 22.1 77 22.6 344 273 26.0 (% of sales) 4.3 4.3 3.9 4.7 3.9 Freight & forwarding 509 408 24.7 412 23.4 1,610 1,347 19.5 (% of sales) 23.0 22.8 20.7 21.8 19.0 Other expenses 382.3 371 3.2 343 11.6 1,347 1,153 16.8 (% of sales) 17.3 20.7 17.2 18.2 16.3 Total expenditure 1,595 1,467 8.7 1,420 12.4 5,540 5,210 6.3 Operating profit 627.0 359.9 74.2 598.7 4.7 1,977 1,971 0.3 OPM (%) 28.2 19.7 852bp 29.7 (144)bp 26.3 27.5 (115)bp Interest 13.8 21 (33.9) 11 27.9 49 22 117.1 Depreciation 106.1 109 (2.3) 76.7 38.3 387.2 297.0 30.4 Other income 52.1 37.9 37.6 98.6 (47.2) 120.3 151.2 (20.5) PBT 559.2 268.3 108.4 609.8 (8.3) 1,662 1,803 (7.8) Provision for taxation 151.7 10 1,383.0 148 2.8 398 585 (31.9) (% of PBT) 27.1 3.8 24.2 24.0 32.4 Reported PAT 407.5 258.1 57.9 462.2 (11.8) 1,264 1,218 3.7 PATM (%) 18.5 14.4 23.2 17.1 17.2 EPS (`) 2.7 1.7 57.2 3.0 (12.3) 8.3 8.0 3.6 Exhibit 2: Financial performance (` cr) 2,500 2,000 1,500 1,000 1,773 1,990 2,048 1,564 1,788 2,207 35 30 25 (%) 500 241 462 391 152 258 407 20 0 15 4QCY09 1QCY10 2QCY10 3QCY10 4QCY10 1QCY11 Net Sales Net Profit OPM (RHS) April 29, 2011 2
Performance highlights Robust top-line growth Ambuja reported a healthy top-line performance during the quarter on account of higher dispatches coupled with better realisations. Net sales increased by 10.9% yoy and by strong 23.4% qoq. During the quarter, Ambuja s dispatches rose by 6.8% yoy and 11.9% qoq. Growth in dispatches was on account of improved demand across the country after the end of prolonged monsoons and capacity additions carried out by the company. During the quarter, Ambuja reported a 3.8% yoy increase in realisation; while on a qoq basis, realisation growth was steep at 10.3%. Realisation improved on account of a `30 40/bag of price hike carried out by cement manufacturers by adopting production discipline. Higher power and fuel costs offset improvement in realisation Despite improved realisations, the company faced margin pressure during the quarter on account of the increase in power and fuel costs. Power and fuel costs rose substantially on account of the increase in coal prices both in the domestic and international markets. Global coal prices were higher by ~30% during the quarter at US$125/tonne. Prices of domestic linkage coal also went up by 30% in March 2011, due to the price hike by Coal India. On a positive note, raw-material costs declined by 44.9% yoy due to the elimination of high-cost external clinker purchase. Ambuja s OPM for the quarter fell marginally by 144bp yoy to 28.2%. Per tonne analysis For 1QCY2011, Ambuja s realisation/tonne improved by 3.8% yoy to `3,913. Power and fuel cost/tonne stood higher by 26.9% yoy due to the substantial increase in coal prices yoy and higher clinker production. However, on a qoq basis, power and fuel costs/tonne declined by 3.5% on account of higher usage of captive power. Freight cost/tonne rose by 15.5% yoy due to higher diesel costs. Thus, operating profit/tonne stood at `1,084, flat on a yoy basis. However, sequentially, operating profit/tonne rose substantially by 70.2% yoy. Exhibit 3: Per tonne analysis (`) 1QCY11 4QCY10 1QCY10 % chg (yoy) % chg (qoq) Realisation/tonne 3,913 3,549 3,769 3.8 10.3 Power and fuel cost/tonne 854 885 673 26.9 (3.5) Freight and forwarding cost/tonne 902 809 781 15.5 11.4 Other costs/tonne 678 735 649 4.5 (7.8) Operating profit/tonne 1,084 637 1,080 0.4 70.2 Depreciation/tonne 188 215 145 29.5 (12.7) Net profit/tonne 695 435 821 (15.3) 59.8 April 29, 2011 3
Investment arguments Capacity addition to maintain robust volume growth In CY2010, Ambuja expanded its clinker capacity by 4.4mn tonnes per annum (mtpa) by setting up clinker plants with capacity of 2.2mtpa each at Bhatapara and Rauri. The company also commissioned grinding units at Nalagarh and Dadri (with capacities of 1.5mn tonnes each) during the year. Further, the company will be adding 2mtpa of total grinding capacity at Bhatapara and Maratha in CY2011, resulting in overall capacity of 27mn tonnes by the end of the year. In October 2010, the company signed an agreement with the Rajasthan State Industrial Development and Investment Corporation for setting up a 2.2mtpa clinkerisation plant at Nagauri District. Going ahead, we expect capacity additions done by the company to drive its growth. Exhibit 4: Installed capacity 30 25 22 24 25 27 27 20 (mtpa) 15 10 5 0 CY2008 CY2009 CY2010 CY2011E CY2012E Presence in high-growth regions to ensure better realisations Ambuja currently derives a major portion of its revenue from the western and northern regions, with both the regions having almost equal shares. We believe the company s significant presence in the high-growth northern region would result in better profitability as compared to players with major exposure to the south, a region that is still reeling under over capacity. New clinker capacities to aid margin expansion Production at the company s clinker plants has stabilised, resulting in elimination of external clinker purchase since 3QCY2010. This has resulted in boosting the company s OPM, which was down 400bp in CY2009 due to external purchase of close to 1.7mn tonnes of high-cost clinker. Ambuja is also expected to record savings in energy cost following the commissioning of 66MW of new captive power capacities in CY2010. The company, which commissioned a 33MW captive power at Bhatapara, has set up another 30MW power plant at Ambuja Nagar, taking its overall captive power capacity beyond 400MW. April 29, 2011 4
Outlook and valuation We expect cement prices to decline in the near term due to the onset of monsoons. The production discipline adopted by cement manufacturers is expected to weaken with upcoming capacities. Further, the full impact of the price hike by Coal India is expected to be felt from 2QCY2011. We expect Ambuja s top line to register a 13.5% CAGR over CY2010 12, with dispatches expected to record a 9.3% CAGR on the back of capacity addition. At current levels, the stock is trading at fair valuations of 9.3x EV/EBITDA and EV/tonne of US$163 on CY2012 estimates. Hence, we maintain our Neutral view on the stock. Exhibit 5: One-year forward EV/EBITDA (EV ` cr) 30,000 20,000 10,000 12x 9x 6x 3x 0 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Exhibit 6: One-year forward EV/tonne 30,000 $70 $100 $130 $160 20,000 ( EV `cr) 10,000 0 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 April 29, 2011 5
Exhibit 7: Recommendation summary Company Reco. CMP Tgt. price Upside FY2013E FY2013E FY2011-13E FY2013E FY2013E (`) (`) (%) P/BV (x) P/E (x) EPS CAGR (%) RoCE (%) RoE (%) ACC* Neutral 1,108 - - 2.6 17.8 2.2 19.5 15.5 Ambuja Cements* Neutral 155 - - 2.7 18.5 1.2 19.3 15.2 India Cement Acc. 99 107 7.8 0.7 13.2 88.3 6.6 5.1 JK Lakshmi Buy 51 66 28.9 0.6 6.7 56.1 5.5 5.3 Madras Cement Neutral 99 - - 1.1 9.5 12.5 9.6 12.4 UltraTech Neutral 1,087 - - 2.1 14.2 22.3 18.0 15.8 ; Note: *December year end. April 29, 2011 6
Profit & loss statement (Standalone) Y/E Dec. (` cr) CY07 CY08 CY09 CY10 CY11E CY12E Total operating income 5,631 6,168 7,181 7,518 8,525 9,679 % chg (10.3) 9.5 16.4 4.7 13.4 13.5 Total Expenditure 3,586 4,461 5,210 5,567 6,561 7,437 Net Raw Materials 398 519 1,446 1,043 1,039 1,187 Other Mfg costs 1,020 1,326 1,423 1,697 2,218 2,500 Personnel 209 266 273 344 392 431 Other 1,960 2,350 2,068 2,483 2,912 3,319 EBITDA 2,045 1,707 1,971 1,951 1,964 2,242 % chg (4.4) (16.5) 15.5 (1.0) 0.7 14.1 (% of Net Sales) 36.3 27.7 27.9 26.4 23.2 23.3 Depreciation& Amortisation 236 260 297 387 466 487 EBIT 1,809 1,447 1,674 1,564 1,498 1,755 % chg (0.2) (20.0) 15.7 (6.6) (4.2) 17.1 (% of Net Sales) 32.1 23.5 23.7 21.2 17.7 18.2 Interest & other Charges 76 32 22 49 20 19 Other Income 194 246 151 120 150 175 (% of PBT) 10 15 8 7 9 9 Recurring PBT 1,926 1,662 1,803 1,635 1,628 1,911 % chg 7.4 (13.7) 8.5 (9.3) (0.5) 17.4 Extraordinary Expense/(Inc.) (786) (308) - (27) - - PBT (reported) 2,712 1,970 1,803 1,662 1,628 1,911 Tax 943 568 585 398 456 620 (% of PBT) 34.8 28.8 32.4 24.0 28.0 32.4 PAT (reported) 1,769 1,402 1,218 1,264 1,172 1,291 ADJ. PAT 983 1,094 1,218 1,237 1,172 1,291 % chg (32.5) 11.3 11.4 1.5 (5.2) 10.1 (% of Net Sales) 17.5 17.7 17.2 16.7 13.8 13.4 Basic EPS (`) 11.6 9.2 8.0 8.2 7.6 8.4 Fully Diluted EPS (`) 11.6 9.2 8.0 8.2 7.6 8.4 % chg 17.5 (20.6) (13.3) 2.9 (7.2) 10.1 April 29, 2011 7
Balance sheet (Standalone) Y/E Dec. (` cr) CY07 CY08 CY09 CY10 CY11E CY12E SOURCES OF FUNDS Equity Share Capital 305 305 305 307 307 307 Preference Capital - - - - - - Reserves& Surplus 4,356 5,368 6,166 7,023 7,786 8,627 Shareholders Funds 4,661 5,673 6,471 7,330 8,094 8,934 Total Loans 330 289 166 65 50 43 Deferred Tax Liability 378 381 486 531 531 531 Total Liabilities 5,370 6,342 7,122 7,926 8,674 9,508 APPLICATION OF FUNDS Gross Block 5,231 5,707 6,224 8,779 9,710 10,148 Less: Acc. Depreciation 2,271 2,514 2,784 3,151 3,617 4,104 Net Block 2,960 3,193 3,440 5,628 6,092 6,044 Capital Work-in-Progress 697 1,947 2,714 931 439 728 Goodwill - - - - - - Investments 1,289 332 727 626 826 1,026 Current Assets 1,587 2,339 1,979 3,135 3,819 4,461 Cash 643 852 880 1,748 2,158 2,525 Loans & Advances 205 300 253 341 373 409 Other 739 1,188 846 1,047 1,288 1,528 Current liabilities 1,169 1,474 1,741 2,394 2,501 2,751 Net Current Assets 418 865 238 741 1,317 1,710 Mis. Exp. not written off 6 4 3 0 - - Total Assets 5,370 6,342 7,122 7,926 8,674 9,508 April 29, 2011 8
Cash flow statement (Standalone) Y/E Dec. (` cr) CY07 CY08 CY09 CY10 CY11E CY12E Profit before tax 2,712 1,970 1,803 1,662 1,628 1,911 Depreciation 236 260 297 387 466 487 Change in WC (154) (464) 522 395 (166) (26) Interest expenses 76 32 22 49 20 19 Less: Other income 194 246 151 120 150 175 Direct taxes paid 943 568 585 398 456 620 Cash Flow from Operations 1,734 983 1,909 1,974 1,342 1,596 (Inc)/ Decin Fixed Assets (750) (1,726) (1,284) (771) (439) (728) (Inc)/ Dec in Investments (156) 957 (395) 101 (200) (200) Other income 194 246 151 120 150 175 Cash Flow from Investing (713) (523) (1,528) (550) (489) (753) Issue of Equity 32 1 8 55 - - Inc./(Dec.) in loans (535) (42) (123) (101) (15) (7) Dividend Paid (Incl. Tax) 178 178 214 462 409 450 Others 76 32 22 49 20 19 Cash Flow from Financing (757) (251) (352) (557) (444) (476) Inc./(Dec.) in Cash 265 209 29 867 410 367 Opening Cash balances 378 643 852 881 1,748 2,158 Closing Cash balances 643 852 881 1,748 2,158 2,525 April 29, 2011 9
Key ratios Y/E Dec. CY07 CY08 CY09 CY10 CY11E CY12E Valuation Ratio (x) P/E (on FDEPS) 13.4 16.9 19.4 18.9 20.4 18.5 P/CEPS 11.8 14.2 15.6 14.5 14.6 13.4 P/BV 5.1 4.2 3.7 3.3 3.0 2.7 Dividend yield (%) 0.8 0.8 0.9 1.9 1.7 1.9 EV/Sales 3.9 3.4 2.8 2.9 2.5 2.1 EV/EBITDA 10.6 12.4 10.2 10.9 10.7 9.0 EV / Total Assets 4.1 3.3 2.8 2.7 2.4 2.1 Per Share Data (`) EPS (Basic) 11.6 9.2 8.0 8.2 7.6 8.4 EPS (fully diluted) 11.6 9.2 8.0 8.2 7.6 8.4 Cash EPS 13.2 10.9 9.9 10.7 10.7 11.6 DPS 1.2 1.2 1.4 3.0 2.7 2.9 Book Value 30.6 37.3 42.4 47.7 52.7 58.1 DuPont Analysis (%) EBIT margin 32.1 23.5 23.3 20.8 17.6 18.1 Tax retention ratio 65.2 71.2 67.6 76.0 72.0 67.6 Asset turnover (x) 1.2 1.2 1.2 1.2 1.3 1.4 ROIC (Post-tax) 26.0 20.2 19.3 19.1 17.0 17.6 Returns (%) ROCE (Pre-tax) 35.8 24.7 24.9 20.8 18.0 19.3 Angel ROIC (Pre-tax) 46.6 38.2 47.4 35.6 26.5 28.5 ROE 24.1 21.2 20.1 17.9 15.2 15.2 Turnover ratios (x) Asset Turnover (Gross Block) 1.2 1.1 1.2 1.0 0.9 1.0 Inventory / Sales (days) 32 45 41 38 43 45 Receivables (days) 8 11 10 7 6 7 Payables (days) 95 108 113 136 136 129 WC cycle (ex-cash) (days) (4) (6) (16) (40) (40) (31) Solvency ratios (x) Net debt to equity (0.1) (0.1) (0.1) (0.2) (0.3) (0.3) Net debt to EBITDA (0.2) (0.3) (0.4) (0.9) (1.1) (1.1) Interest Coverage (EBIT / Interest) 23.8 45.1 74.7 32.1 74.2 91.4 April 29, 2011 10
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%) April 29, 2011 11