Ambuja Cements (Q1 CY11)

CMP Rs158, Target Rs124, Downside 21.3%

• Revenues grew by 10.1%, marginally above estimate on higher  volumes and improved realizations
  
• Surge in power, freight and other overheads pulls down OPM by 405bps yoy 
  
• Reported PAT meets expectation; posts 12% decline to Rs4.1bn
  
• Stock trades at a premium to its replacement cost; retain SELL with a 9-mth TP of Rs124

ACL revenues grew by 10% yoy to Rs22.2bn, above our expectation of Rs21.5bn as realization improved 3.8% yoy. ACL posted a 7% volume growth on the back of commissioning of new units. Surprisingly, average realization for the quarter jumped 10% qoq as most cement players increased prices during the quarter.

OPM contracts 400bps despite fall in RM cost

OPM contracted 400bps yoy to 28.2%, below our estimate of 31.4% yoy. Lower than expected operating performance was on account of:

1) Increase in fuel prices translating into higher freight cost (Rs902/ton, highest in the last four quarters), 2) Surge in other overheads (Rs678/ton against Rs549/ton a year ago), and 3) Increase in power cost by 36% due to increase in international coal prices (average international coal prices at US$128 as against US$94 in same quarter previous year).

However, raw material cost adjusted for inventory declined by 45% yoy (primarily due to higher self clinker production) thereby cushioning the impact on OPM.

PAT in-line, but valuation appear expensive; retain SELL

Margin contraction led to a 12% decline in reported PAT, in line with our estimate. Recent capacity addition resulted into increased depreciation while higher interest expense further eroded PAT.

ACL is likely to report earnings cagr of 13% over CY10-12 but remains expensive at CY12 EV/ton of US$167, 8.6x EV/EBIDTA and 15.4x PE. We retain SELL with a revised price 9-mth target of Rs124.