Upside– stronger volume growth, higher-than-expected cement prices and sharper decline in operating costs. Downside: Much weaker volume growth; lower-than-expected cement prices; sharp increases in operating costs.
Cement sales of 5.3mmt (-4.2% y-o-y) were weaker (1% below our estimate). We note that for Ambuja’s subsidiary (ACC, ACC IN) cement sales had fell by 2% y-o-y. We think heavy and extended monsoon and also floods in Ambuja’s key markets (UP, Bihar, Maharashtra and Gujarat) were behind the weaker volumes.
> Blended realisations at Rs 251/bag (+5% y-o-y, -2% q-o-q) were 2% higher than our estimates. Cement realisation declined by Rs 6/bag to Rs 244/ bag (-2% q-o-q). ACEM’s realisation drop was lower than ACC’s (-5% q-o-q) likely due to low presence in the South (where price cuts were higher).
> Per-unit operating costs were up 7% q-o-q, and were 7% ahead of our estimate due to higher per unit power and fuel costs (+10% q-o-q) and internal freight costs (+15% q-o-q).
n While reported revenue was 1% ahead of our estimates, reported Ebitda at Rs 4.4 bn (+23% y-o-y, -37% q-o-q) was 17% below our estimate mainly due to higher costs.
> Blended Ebitda margin of Rs 841/t
(-30% q-o-q) was 16% lower than our expectation of Rs 997/t. Core Ebitda margins (excluding other operating income) of Rs 707/t also fell by 35% q-o-q.
> Similar to ACC, ACEM is currently evaluating the option to pay lower corporate tax rate, but has continued with earlier tax rate for Q3CY19.
> Reported PAT at Rs 2.3 bn (+31% y-o-y, – 43% q-o-q) was 20% below estimate.
> 9MCY19 stand-alone EPS of Rs 5.4 was 73% of our CY19F EPS. 9MCY19 consolidated EPS of Rs 7.6 was 74% of our CY19F consolidated EPS.
Valuation methodology: We use 14x CY20F EV/Ebitda to value ACEM’s stand-alone business. We value ACEM’s 50% stake in ACC (ACC IN, Neutral) at a 20% discount to our TP of Rs 1,750. The stock trades at 18.4x CY20F P/E. Ultratech Cement (Buy, TP Rs 5,500) is our preferred pick in this space.
Key risks: Upside– stronger volume growth, higher-than-expected cement prices and sharper decline in operating costs. Downside: Much weaker volume growth; lower-than-expected cement prices; sharp increases in operating costs.