(ACEM IN) Rating: HOLD CMP: Rs201 TP: Rs210 October 24, 2018 Q3CY18 Result Update Change in Estimates Target Reco Change in Estimates Current Previous CY18E CY19E CY18E CY19E Rating HOLD ACCUMULATE Target Price 210 251 Sales (Rs. m) 2,54,487 2,74,518 2,55,845 2,77,443 % Chng. (0.5) (1.1) EBITDA (Rs. m) 35,028 40,837 36,559 44,123 % Chng. (4.2) (7.4) EPS (Rs.) 8.7 10.0 8.9 11.0 % Chng. (2.5) (9.5) Key Financials CY16 CY17 CY18E CY19E Sales (Rs. bn) 198 231 254 275 EBITDA (Rs. bn) 29 33 35 41 Margin (%) 14.7 14.2 13.8 14.9 PAT (Rs. bn) 11 14 17 20 EPS (Rs.) 5.7 7.3 8.7 10.0 Gr. (%) 31.9 26.5 19.5 14.8 DPS (Rs.) 2.5 3.6 4.3 5.0 Yield (%) 1.2 1.8 2.2 2.5 RoE (%) 5.9 7.1 8.1 8.8 RoCE (%) 7.5 10.1 10.6 12.2 EV/Sales (x) 1.8 1.5 1.3 1.1 EV/EBITDA (x) 12.1 10.3 9.1 7.6 PE (x) 35.0 27.6 23.1 20.2 P/BV (x) 2.0 1.9 1.8 1.7 Key Data ABUJ.BO ACEM IN 52-W High / Low Rs.289 / Rs.189 Sensex / Nifty 33,847 / 10,147 Market Cap Rs.399bn/ $ 5,427m Shares Outstanding 1,986m 3M Avg. Daily Value Rs.1686.12m Shareholding Pattern (%) Promoter s 63.48 Foreign 17.33 Domestic Institution 11.80 Public & Others 7.39 Promoter Pledge (Rs bn) - Disappointing show; Valuations de-rating to gather momentum Ambuja Cement (ACEM) reported disappointing set of Q3CY18 earnings due to steeper than expected increase in costs. In our Q2CY18 post earnings note, we had highlighted that surprise beat in Q2 was led by unsustainable lower reported costs primarily the other expenses. Hence, we kept out estimates unchanged post Q2 earnings factoring weak margins in H2. However, Q3 margins fell steeper than our expectation. Investors argue that earnings would revive for the sector as the costs/prices have peaked-out/bottomed-out. However, we believe that pricing power is still couple of years away due to deep-rooted impact of demonetization and GST on private spending (having the pricing power). However, strong Govt spending helped to make-up for weak trade volume but at the cost of significantly lower margins. Even if costs come down, it would be passed on to customers due to rising share of non-trade demand. Cement producers have been blaming Ultratech (UTCEM) for lower prices to support high utilization at acquired units of JPA. On the contrary, we believe that weak quality of demand is not allowing UTCEM to increase prices despite sharp surge in costs. Given the weak outlook on prices, we cut our earnings estimates for by 9% for CY19e. With deteriorating fundamentals, we de-rate EV/EBITDA from 13x to 12x CY19e and downgrade our recommendation to HOLD with TP at Rs210 (earlier Rs251). Higher than expected costs led the miss in earnings: Volume rose 9% YoY to 5.5mn tonnes (t), in line with our estimate. Realisations rose marginally 0.6%/Rs28 QoQ (+1.2%/Rs53 YoY) to Rs4,594 (PLe:Rs4,588)/t. Impacted by 4%/9% YoY increase in Energy/Freight cost and higher packing and maintenance costs, Cost/t rose 2.8%/Rs113 YoY at Rs4,109 above our estimate of Rs3,911. Marred by higher costs, EBITDA/t missed our estimates by wide margin by 28% at Rs485 (PLe:Rs677), down 11% YoY. Hence, EBITDA fell 3% YoY to Rs2.66bn (PLe:Rs3.65bn). Led by 27% YoY fall in other income (on account of absence of dividend from ACC), Adj. PAT fell 25% YoY to Rs1.79bn (PLe:2.5bn). Stock Performance (%) 1M 6M 12M Absolute (10.8) (18.8) (28.6) Relative (2.9) (17.3) (31.4) Kamlesh Bagmar kamleshbagmar@plindia.com 91-22-66322237 Amit Khimesra amitkhimesra@plindia.com 91-22-66322244 October 24, 2018 1
Q3CY18 Result Highlights Y/e December Q3CY18 Q3CY17 YoY gr. (%) Q2CY18 9MCY18 9MCY17 YoY gr. (%) Net Sales 25,220 23,200 8.7 29,270 82,120 76,670 7.1 Raw Material 3,080 2,709 13.7 2,113 7,310 7,363 (0.7) % of Net Sales 12.2 11.7 7.2 8.9 9.6 Staff Costs 1,633 1,613 1.3 1,758 5,087 4,987 2.0 % of Net Sales 6.5 7.0 6.0 6.2 6.5 Power & Fuel 5,498 4,860 13.1 6,547 18,396 15,894 15.7 % of Net Sales 21.8 20.9 22.4 22.4 20.7 Freight 7,311 6,118 19.5 8,784 24,384 20,904 16.6 % of Net Sales 29.0 26.4 30.0 29.7 27.3 Other Expenses 5,035 4,799 4.9 4,744 14,882 14,636 1.7 % of Net Sales 20.0 20.7 16.2 18.1 19.1 Total Expenditure 22,558 20,098 12.2 23,946 70,059 63,784 9.8 EBITDA 2,662 3,102 (14.2) 5,324 12,062 12,886 (6.4) Margin (%) 10.6 13.4 18.2 14.7 16.8 Depreciation 1,360 1,403 (3.1) 1,364 4,116 4,302 (4.3) Other income 1,402 1,908 (26.5) 2,810 5,715 4,154 37.6 EBIT 2,704 3,606 (25.0) 6,770 13,660 12,738 7.2 Interest 192 313 (38.6) 192 641 855 (25.0) PBT 2,512 3,293 (23.7) 6,578 13,019 11,883 9.6 Extraordinary income/(expense) - 446 - - 446 PBT (After EO) 2,512 3,739 (32.8) 6,578 13,019 12,329 5.6 Tax 726 635 14.4 1,586 3,840 2,816 36.4 % PBT 28.9 17.0 24.1 29.5 22.8 Reported PAT 1,786 3,104 (42.5) 4,993 9,179 9,513 (3.5) Adjusted PAT 1,786 2,734 (34.7) 4,993 9,496 9,122 4.1 Source: Company, PL Operating Metrics Y/e December Q3CY18 Q3CY17 YoY gr. (%) Q2CY18 9MCY18 9MCY17 YoY gr. (%) Volume (mn te) 5.5 5.0 8.5 6.4 18.1 17.1 5.6 Net Realisations/t (Rs) 4,619 4,612 0.15 4,566 4,538 4,473 1.4 EBITDA/t (Rs) 488 617 (20.9) 831 667 752 (11.3) Source: Company, PL October 24, 2018 2
Financials Income Statement (Rs m) Net Revenues 1,98,371 2,30,864 2,54,487 2,74,518 YoY gr. (%) 111.7 16.4 10.2 7.9 Cost of Goods Sold 23,311 27,760 32,301 34,963 Gross Profit 1,75,060 2,03,104 2,22,186 2,39,555 Margin (%) 88.2 88.0 87.3 87.3 Employee Cost 13,701 15,112 15,411 16,045 Other Expenses 41,053 42,720 43,873 46,375 EBITDA 29,245 32,668 35,028 40,837 YoY gr. (%) 103.3 11.7 7.2 16.6 Margin (%) 14.7 14.2 13.8 14.9 Depreciation and Amortization 14,609 12,195 12,377 13,448 Balance Sheet Abstract (Rs m) Non-Current Assets Gross Block 2,28,688 2,35,669 2,48,303 2,61,953 Tangibles 2,28,688 2,35,669 2,48,303 2,61,953 Intangibles - - - - Acc: Dep / Amortization 14,585 26,687 39,064 52,513 Tangibles 14,585 26,687 39,064 52,513 Intangibles - - - - Net fixed assets 2,14,103 2,08,982 2,09,239 2,09,440 Tangibles 2,14,103 2,08,982 2,09,239 2,09,440 Intangibles - - - - EBIT 14,636 20,473 22,650 27,389 Margin (%) 7.4 8.9 8.9 10.0 Net Interest 1,530 2,058 1,865 2,010 Other Income 7,245 8,346 11,801 13,134 Capital Work In Progress 10,098 13,469 15,860 16,975 Goodwill - - - - Non-Current Investments 4,765 4,826 5,246 5,666 Net Deferred tax assets (10,153) (11,392) (11,383) (11,373) Other Non-Current Assets 16,390 16,960 17,490 17,820 Profit Before Tax 19,965 27,549 32,586 38,513 Margin (%) 10.1 11.9 12.8 14.0 Total Tax 5,738 8,229 9,834 11,964 Effective tax rate (%) 28.7 29.9 30.2 31.1 Profit after tax 14,228 19,321 22,753 26,548 Minority interest 3,290 4,285 5,667 6,915 Share Profit from Associate 113 128 130 130 Adjusted PAT 11,388 14,407 17,215 19,764 YoY gr. (%) 31.9 26.5 19.5 14.8 Margin (%) 5.7 6.2 6.8 7.2 Extra Ord. Income / (Exp) (252) 515 - - Reported PAT 11,051 15,163 17,215 19,764 YoY gr. (%) 36.8 37.2 13.5 14.8 Margin (%) 5.6 6.6 6.8 7.2 Other Comprehensive Income - - - - Total Comprehensive Income 11,051 15,163 17,215 19,764 Equity Shares O/s (m) 1,986 1,986 1,986 1,986 EPS (Rs) 5.7 7.3 8.7 10.0 Current Assets Investments - - - - Inventories 21,635 24,583 25,313 26,873 Trade receivables 9,241 9,315 8,930 8,814 Cash & Bank Balance 45,640 62,316 78,509 87,379 Other Current Assets 5,417 13,329 11,916 13,769 Total Assets 3,28,238 3,55,004 3,73,772 3,88,050 Equity Equity Share Capital 3,971 3,971 3,971 3,971 Other Equity 1,94,238 2,02,751 2,15,184 2,24,582 Total Networth 1,98,209 2,06,722 2,19,155 2,28,553 Non-Current Liabilities Long Term borrowings 290 241 241 241 Provisions 1,856 1,803 1,803 1,803 Other non current liabilities 57 72 72 72 Current Liabilities ST Debt / Current of LT Debt - - - - Trade payables 20,685 27,983 28,831 26,850 Other current liabilities 53,264 60,693 62,219 65,580 Total Equity & Liabilities 3,28,238 3,55,004 3,73,772 3,88,050 October 24, 2018 3
Cash Flow (Rs m) Key Financial Metrics Year PBT 20,078 27,677 32,586 38,513 Per Share(Rs) Add. Depreciation 14,609 12,195 12,377 13,448 EPS 5.7 7.3 8.7 10.0 Add. Interest 1,530 2,058 1,865 2,010 CEPS 13.1 13.4 14.9 16.7 Less Financial Other Income 7,245 8,346 11,801 13,134 BVPS 99.8 104.1 110.4 115.1 Add. Other (4,298) (3,873) (4,664) (5,636) FCF 9.5 11.7 10.0 9.6 Op. profit before WC changes 31,920 38,056 42,164 48,335 DPS 2.5 3.6 4.3 5.0 Net Changes-WC 2,143 1,599 2,576 (2,582) Return Ratio(%) Direct tax (5,959) (5,316) (9,843) (11,974) RoCE 7.5 10.1 10.6 12.2 Net cash from Op. activities 28,103 34,339 34,897 33,779 ROIC 7.0 10.2 11.7 13.8 Capital expenditures (43,991) (11,024) (15,025) (14,765) RoE 5.9 7.1 8.1 8.8 Interest / Dividend Income - - - - Balance Sheet Others 2,342 3,236 4,664 5,636 Net Debt : Equity (x) (0.2) (0.3) (0.4) (0.4) Net Cash from Invt. activities (41,649) (7,788) (10,361) (9,129) Net Working Capital (Days) 19 9 8 12 Issue of share cap. / premium (108) - - - Valuation(x) Debt changes 41 (27) - - PER 35.0 27.6 23.1 20.2 Dividend paid (8,722) (8,602) (6,478) (13,770) P/B 2.0 1.9 1.8 1.7 Interest paid (870) (1,558) (1,865) (2,010) P/CEPS 12.3 12.6 14.0 15.7 Others 84 50 - - EV/EBITDA 12.1 10.3 9.1 7.6 Net cash from Fin. activities (9,576) (10,137) (8,343) (15,780) EV/Sales 1.8 1.5 1.3 1.1 Net change in cash (23,122) 16,414 16,193 8,870 Dividend Yield (%) 1.2 1.8 2.2 2.5 Free Cash Flow 18,959 23,282 19,872 19,014 Quarterly Financials (Rs m) Y/e Dec Q4CY17 Q1CY18 Q2CY18 Q3CY18 Net Revenue 26,120 27,630 29,270 25,220 YoY gr. (%) 19.4 9.2 3.9 10.4 Raw Material Expenses 1,102 2,118 2,113 3,080 Gross Profit 25,018 25,512 27,157 22,140 Margin (%) 95.8 92.3 92.8 87.8 EBITDA 4,401 4,075 5,324 2,662 YoY gr. (%) 60.5 (7.4) 30.6 (50.0) Margin (%) 16.8 14.7 18.2 10.6 Depreciation / Depletion 1,427 1,393 1,364 1,360 EBIT 2,974 2,683 3,960 1,303 Margin (%) 11.4 9.7 13.5 5.2 Net Interest 217 257 192 192 Other Income 1,156 1,503 2,810 1,402 Profit before Tax 3,912 3,928 6,578 2,512 Margin (%) 15.0 14.2 22.5 10.0 Total Tax 859 1,211 1,586 726 Effective tax rate (%) 21.9 30.8 24.1 28.9 Profit after Tax 3,054 2,718 4,993 1,786 Minority interest - - - - Share Profit from Associates - - - - Adjusted PAT 2,898 2,718 4,993 1,786 YoY gr. (%) 52.8 10.2 27.3 (25.1) Margin (%) 11.1 9.8 17.1 7.1 Extra Ord. Income / (Exp) 486 - - - Reported PAT 3,384 2,718 4,993 1,786 YoY gr. (%) 88.8 10.2 27.3 (35.0) Margin (%) 13.0 9.8 17.1 7.1 Other Comprehensive Income - - - - Total Comprehensive Income 3,384 2,718 4,993 1,786 Avg. Shares O/s (m) 1,986 1,986 1,986 1,986 EPS (Rs) 1.5 1.4 2.5 0.9 Key Operating Metrics Stand. Volume 21.5 23.0 24.3 25.9 Stand. Net Realisations (Rs/te) 4,231 4,457 4,501 4,546 Stand. EBITDA/ te (Rs/te) 735 774 668 722 Stand. RM cost (Rs/ te) 360 395 395 395 Stand. Power, Oil & Fuel (Rs/ te) 850 971 1,023 1,056 Stand. Freight Charges (Rs/ te) 1,152 1,250 1,346 1,321 Cons. Volume 44.5 49.2 52.5 55.7 Cons. Net Realisations (Rs/te) 4,462 4,693 4,845 4,932 Cons. EBITDA/ te (Rs/te) 658 664 667 734 October 24, 2018 4
Price Chart Recommendation History (Rs) 300 272 243 215 187 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 No. Date Rating TP (Rs.) Share Price (Rs.) 1 25-Oct-17 Accumulate 300 282 2 10-Jan-18 Accumulate 315 277 3 13-Apr-18 Accumulate 293 237 4 07-May-18 Accumulate 260 237 5 12-Jun-18 Accumulate 235 206 6 10-Jul-18 Accumulate 237 201 7 26-Jul-18 Accumulate 250 208 8 05-Oct-18 Accumulate 251 214 Analyst Coverage Universe Sr. No. CompanyName Rating TP (Rs) Share Price (Rs) 1 ACC BUY 1,710 1,540 2 Ambuja Cement Accumulate 251 214 3 Coal India BUY 340 273 4 Heidelberg Cement India BUY 200 139 5 Hindalco Industries Accumulate 308 252 6 Hindustan Zinc Accumulate 315 289 7 Jindal Steel & Power BUY 290 191 8 JK Lakshmi Cement Hold 359 298 9 JSW Steel BUY 450 378 10 NMDC Accumulate 138 115 11 Shree Cement Hold 18,100 16,384 12 Steel Authority of India Hold 81 69 13 Tata Steel BUY 780 560 14 The Ramco Cements Hold 735 638 15 Ultratech Cement Hold 3,820 3,610 PL s Recommendation Nomenclature (Absolute Performance) Buy : > 15% Accumulate : 5% to 15% Hold : +5% to -5% Reduce : -5% to -15% Sell : < -15% Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly October 24, 2018 5
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