CY20e volumes cut by 6% due to Covid-19; limited upside from current levels; ‘Neutral’ maintained.
Ambuja Cements (ACEM)’s Q1CY20 result reflects the adverse impact of COVID-19. Despite 10% y-o-y decline in volumes, Ebitda grew 30% y-o-y due to higher realisation and sequential decline in costs. We have cut our standalone CY20 volume estimate by a further 6% (to 19.2mt, down 20% y-o-y), factoring in the impact of the COVID-19 crisis. We maintain CY21 estimates and a Neutral rating, with a target price of Rs 190.
Cost-reduction-led beat on Ebitda
Volumes declined by 10% y-o-y (due to the COVID-19 shutdown) to 5.77mt, leading to a 3.4% y-o-y drop in revenue to Rs 28.2 bn (in line with estimates). Ebitda rose by 30% y-o-y (+10% q-o-q) to Rs 6.0 bn, despite lower volumes, led by a 7.0% y-o-y increase in realisation to Rs 4,900/t (est. – Rs 4,924/t). Unitary cost/t was 3%, lower than our est. of Rs 3,862 (-2.6% q-o-q, flat y-o-y). The Ebitda margin came in at 21.3% (+5.5pp y-o-y, +3.9pp q-o-q).
Reported PAT at Rs 4.0 bn was lower by 7% y-o-y and 12% q-o-q (est. – Rs 4.25 bn) due to non-receipt of dividend income from ACC, expected to be received in Q2CY20. Adj. of dividend income, PAT rose 35% y-o-y.
Highlights from management commentary
After the shutdown of operations for nearly four weeks to contain the coronavirus epidemic, ACEM resumed operations at some of its plants in a phased manner. The company recorded healthy volume growth over January–February, but March volumes were impacted from the shutdown. ACEM witnessed decline in power and fuel cost due to operational efficiencies and lower prices, as well as a reduction in logistics cost. The company expects demand to stabilise in the near term as rural demand and construction (road and irrigation projects) should gain momentum post the lockdown.
ACEM has adopted Ind-AS 116 from 1st Jan’20, which led to a reduction in freight cost by Rs 98.5 m and rent by Rs 10 m. On the other hand, depreciation expense rose by Rs 159 m and finance cost by Rs 73 m. Other expenses were also higher by Rs 162 m on account of foreign exchange resulting from the translation of lease liability.
Valuation and view
We see limited share price upside in ACEM from current levels, given the expected margin pressure due to the expiry of its incentives at Maratha Cement Works as well as a fixed cost addition next year from its new plant at Marwar Mundwa. We value ACEM at 9x CY21e EV/Ebitda and value its stake in ACC at a 10% discount to the target price. We maintain our Neutral rating on the stock, with a target price of Rs 190.