Hold Ambuja Cements, target Rs 205: ICICI Direct
During the quarter, Ambuja witnessed soft demand in its operating regions owing to liquidity issues in the market.
Shares of Ambuja Cements traded at Rs 207.1 around 11:15 am on 29 July, 2019. The brokerage has set a one-year horizon for the stock to hit the target price.
Rationale behind the 'hold' call:
Weak demand hurts volumes, realisations benign
For Q2CY19, Ambuja reported mixed bag results vis-à-vis our expectations. Revenues remained flat YoY at Rs 2,978 crore (below the brokerage's estimate of Rs 3,167 crore).
While realisations grew 8 per cent year-on-year (YoY) to Rs 5,120/t (agaist the brokerage's estimate of Rs 4,900/t), the same was overshadowed by a dip in volumes by 8.6 per cent YoY to 5.82 MT (against the brokerage's estimate of 6.45 MT) owing to weak demand in the north and west regions where Ambuja has a strong presence.
Despite flattish revenues, better realisations helped the company register 12.2 per cent growth in Ebitda to Rs 698 crore (above the brokerage's estimate of Rs 653 crore). Margins expanded 282 bps YoY to 23.4 per cent and Ebitda/t witnessed an increase of 22.8 per cent YoY to Rs 1,200/t.
However, PAT came in line with our estimates at Rs 412 crore owing to higher tax provisions up 21 per cent YoY against PBT de-growth of nearly 8 per cent YoY.
Volume growth to remain weak
During the quarter, Ambuja witnessed soft demand in its operating regions owing to liquidity issues in the market. This resulted in 8.6 per cent de-growth in volumes for Ambuja.
"With the following two quarters expected to remain weak due to monsoons, we do not expect a major volume uptick for CY19E," said the brokerage. Also, capacity constraints for the company would continue to loom in CY20E.
"We model 2.9 per cent and 5 per cent growth in volumes in CY19E and CY20E, respectively, implying 4 per cent CAGR in CY18-20E," the brokerage added.
Profitability to improve leading to steady Ebitda growth
Realisations have been the saviour for the company during the quarter, growing 8 per cent YoY due to strong pricing aided by increasing focus towards premium products.
The company has been working towards cost saving initiatives.
During CY18, power consumption was at 76.63 kwh/t in CY18 against 77.62 kwh/t in CY17 while fuel consumed per kg of clinker was at 760 kcal/kg in CY18 against 759 kcal/kg in CY17.
With continued focus on cost control measures and an expected growth of 2.3 per cent CAGR in CY18-20E, the brokerage expects Ambuja’s margins to improve to 19.1 per cent by CY20E leading to an Ebitda CAGR of 13.8 per cent during the same period.
Valuation & outlook
The government’s focus on the infrastructure development and housing for all is expected to bode well for cement demand. Despite lower growth expected in revenues, RoCE is expected to improve (from 11.4 per cent in CY18 to 16.1 per cent in CY20E).
However capacity bottlenecks would continue to pose a challenge to the growth of the company, which should lead to market share loss in its markets.