1. Kotak puts ‘Reduce’ rating on Ambuja Cements with target price of Rs 230

Kotak puts ‘Reduce’ rating on Ambuja Cements with target price of Rs 230

Ambuja’s standalone EBITDA declined 14% y-o-y to Rs 3.7 billion (+24% q-o-q) amid rising cost pressures and subdued volumes (+3% y-o-y). The stock is expensive at 15X CY2017E EBITDA and 32X earnings.

By: | Published: May 4, 2017 4:27 AM
Kotak, EBITDA, TP, Ambuja, Ambuja Cements Ambuja’s standalone EBITDA declined 14% y-o-y to Rs 3.7 billion (+24% q-o-q) amid rising cost pressures and subdued volumes (+3% y-o-y). The stock is expensive at 15X CY2017E EBITDA and 32X earnings. (Source: IE)

Ambuja’s standalone EBITDA declined 14% y-o-y to Rs 3.7 billion (+24% q-o-q) amid rising cost pressures and subdued volumes (+3% y-o-y). The stock is expensive at 15X CY2017E EBITDA and 32X earnings. We maintain Reduce with a revised TP of Rs 230 (from Rs 235). Ambuja reported 3% y-o-y increase in volumes, similar to ACC’s but ahead of Ultratech’s volume growth in the quarter. ACEM reported revenues of Rs 25.4 billion (+5% y-o-y, +15% q-o-q), EBITDA of Rs 3.7 billion (-14% y-o-y, +24% q-o-q) and net income of Rs 2.5 billion (-19% y-o-y, +40% q-o-q) against our estimate of Rs 24.8 b, Rs 3.6 billion and Rs 2.1 billion, respectively.

Despite 2% y-o-y increase in realisations to Rs 4,210/tonne (-4% q-o-q), EBITDA/tonne declined by 16% y-o-y to Rs 606/tonne (+3% q-o-q) due to 6% y-o-y increase in costs to Rs 3,600/tonne (-5% q-o-q).

Lower effective tax rate of 21%, and higher other income from write-back of provisions relating to interest on income tax led to net income of Rs 2.5 billion compared to our estimates of Rs 2.1 billion. ACEM’s consolidated EBIDTA declined 11% y-o-y to Rs 7.3 billion (+42% q-o-q) despite volume growth of 3% y-o-y due to cost pressures; EBITDA/tonne declined 14% y-o-y to Rs 576/tonne.

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Cement prices in ACEM’s key markets increased by ~Rs 23/bag m-o-m in April 2017. Weak cement prices (-4% q-o-q) and volumes (+3% q-o-q) in Q1CY17 led to revision in earnings estimates, though price increases taken in April 2017 lend some credibility to our revised assumption of Rs 380/tonne (Rs 25/bag) increase in cement realisations in CY2017 for ACEM.

Any rollback in prices here on, and which remains a possibility given lackluster demand will result in another year of earnings downgrade as seen in the past few years. At 15X EV/EBITDA on CY2017E, ACEM is trading at historical peak multiples with EBITDA growth of 28% CAGR (10% growth in CY2016) and earnings growth of 34% CAGR over CY2016-19E. We cut our consolidated EBITDA estimate for CY2017-18E by 4-6%. We estimate EPS of Rs 7.7, Rs 11.3 and Rs 14 for CY2017E, CY2018E and CY2019E. The stock trades at 32X/22X CY2017/18E earnings.

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