Ambuja Cements (Q4 CY10)

CMP Rs125, Target price Rs112, Downside 10.4%

• Revenues grew by 2%, below our estimate on account of lower realization
• Surge in power, freight and other overheads pulls down OPM by 580bps yoy   
• PAT grew 4% to Rs2.5bn aided by lower tax outflow
• Retain SELL; Traders at a premium to replacement cost

Lower realization translate into mere 2% revenue growth 

ACL revenues grew by mere 2% yoy to Rs18.3bn, below our expectation of Rs19bn as realization dropped 3.5% yoy. Surprisingly, average realization for the quarter stood flat on a qoq basis despite a 5-15% price hike announced by most cement players during the quarter. ACL posted a 5% volume growth on the back of commissioning of new units.

OPM contracts as power, freight and other overheads rise 

OPM for ACL contracted by 585bps yoy to 19.8%, below our estimate of 22.1%. Lower than expected operating performance was on account of:

A) Increase in diesel prices and transport strike at Himachal Pradesh, translating into higher freight cost, B) Surge in other overheads (Rs823/ton against Rs689/ton a year ago), and C) Increase in power cost due to increase in international coal prices.

Raw material cost (lower clinker purchase) adjusted for inventory decline by 26.2% yoy thereby arresting further slide at PBIDT level.

Prior tax adjustments translate into lower tax outgo  

Reported PAT for ACL grew 4% yoy at 2.5bn. This increase in core earnings was due to lower income tax expenses. Prior tax adjustments led to a lower tax outgo during the quarter as effective tax rate stood at 4% as against 39.3% reported in Q4 CY09. Recent capacity addition resulted into depreciation and interest cost being higher by ~26% and ~277% respectively.

Retain Sell; remains expensive at CY11 EV/ton of US$128

We lower our OPM assumptions estimates for ACL as we factor in higher international coal prices translating into a 10% reduction in CY11E EPS. We project ACL to report earnings CAGR of 7.4% over CY10-12. Despite the recent correction in the stock price, ACL remains expensive at CY11 EV/ton US$128, 7.7x EV/EBIDTA and 14.5x PE. We retain SELL rating with a revised price target of Rs112.