JP Morgan
Ambuja Cement?s annual report for CY12 captures the issues facing the cement industry ? weak demand, double digit cost increase, over capacity and strong pricing power. From here, in our view, most of the cost increases are sticky as they are essentially tied to energy. Pricing power needs demand recovery which in our view is likely only in H2 CY13E. We remain underweight on Ambuja Cements.
Another year of all round cost increases: ACEM?s annual report highlighted the continued cost pressures on the industry. The increase in diesel prices and the sharp railway freight hike (20-22%) in March 12 led to increase in freight cost of raw materials and finished goods (freight cost/Mt was up 13% y-o-y). RM cost per/Mt increased with fly ash cost increasing 14% and gypsum cost up 25% y-o-y due to increase in transportation costs. We do find ACEM?s move away from captive power surprising (60% in CY12 against 70% in CY11 and 80% in CY10). ACEM indicated that while grid power costs increased 6% y-o-y, cost of coal in power plant was up 8.6% y-o-y. We expect costs to remain elevated in CY13 driven by hike in bulk diesel prices, increase in railway freight, higher custom duty on imported coal and payment of technology and know how fees.
Cement prices also up: Against the cost increase, ASP/T increased around 11% y-o-y and this allowed Ebitda/T to increase by 22% y-o-y to R1,100/T. Cement prices did correct in Nov-Dec 2012, but have moved up since.
How did ACEM?s markets fare in CY12? In CY12, ACEM?s domestic volume growth of 4% was driven by North (9% y-o-y, aided by elections, in our view) and East India (7% y-o-y), while West/South India declined 2.6% y-o-y. In our view, at some point in CY13 election led spending should pick up, but is likely in H2. We cut ACEM?s CY13E volume growth to +5%.
Capex, still no timeline on Rajasthan: The greenfield 4.5MT cement project in Rajasthan is currently in the process of land acquisition and ACEM expects to start construction in ?later part of 2013?. Spare capacity remains high, but if the Rajasthan project gets delayed any further, ACEM does risk losing market share in CY15-16E.