Stock Recommendation | Ambuja Cements - REDUCE - Target price : 195

Ambuja reported consolidated revenues of Rs60.2 bn (+12% yoy, -12% qoq), EBITDA of Rs8 bn (+4% yoy, -36% qoq) and net-income of Rs2.9 bn (+10% yoy, -45% qoq). Consolidated sales volumes increased 9% yoy to 12 mn tons (-12% qoq) while EBITDA/ton declined 27% qoq to Rs670/ton (-5% yoy). EBITDA/ton declined as cost (per ton) increased 6% qoq to Rs4,340/ ton (+4% yoy) due to higher energy costs and other expenses

Changes in our estimates

Exhibit 6 highlights key changes in our estimates.
▶ Ambuja standalone—lower EBITDA estimate by 8-12%. We keep our volume estimate unchanged at 24.6 mn tons, 26.5 mn tons and 28.4 mn tons for CY2018E, CY2019E and CY2020E. We cut our realization assumption by 1-2% and tweak our cost assumptions—this results in a decline in our standalone EBITDA estimate by 8-12% to ₹ 20.4 bn, ₹24.9 bn and Rs28 bn for CY2018E, CY2019E and CY2020E. We estimate standalone EPS of ₹6.6, ₹8.1 and ₹9.4 for CY2018E, CY2019E and CY2020E.
▶ Ambuja consolidated—EBITDA estimate cut by 5-7% as we incorporate revised estimates of ACC. The above revision combined with our earlier change in ACC’s estimates results in a 5-7% cut in our consolidated EBITDA estimates. We estimate consolidated EBITDA of ₹39.6 bn, ₹46.2 bn and Rs51.8 bn for CY2018E, CY2019E and CY2020E. We estimate consolidated EPS of ₹7.7, Rs9.7 and ₹11.3 for CY2018E, CY2019E and CY202E.
Our target price of Rs195/share is based on March 2020E financials.
Key highlights from 3QCY18 results
▶ Realizations—ACEM’s standalone realizations increased 1% qoq to Rs4,790/ ton (+4% yoy). We note that the company has large dependence on North (40%) and West markets (40%) and per our channel checks, cement prices improved by 3% qoq in North markets but declined 1% qoq in the Western region during the quarter.
▶ Profitability and costs—ACEM’s EBITDA/ton declined 33% qoq to Rs656/ton (-7% yoy) in 3QCY18 largely due to an increase in costs. Exhibit 4 highlights major costs (on per ton basis) reported by the company, which increased by 4% yoy to Rs3,640/ ton (+4% yoy, +2% qoq). We highlight that ACEM’s energy cost has only increase by 4% yoy to Rs1,002/ton (-2% qoq), much lower than 19% yoy cost increase reported by Ultratech (Rs,1099/ton, +7% qoq). The company has highlighted that improved efficiency parameters have aided in containing energy costs.
▶ Greenfield project in Rajasthan. Ambuja is investing in a new Greenfield project in Rajasthan—the company will set up a 3.1 mtpa clinkerisation plant at Marwar Mundwa. The project will be set-up in two phases, in the first phase Ambuja will invest Rs13.9 bn for setting up a 1.7 mtpa clinkerization capacity expected to be commissioned by 2HCY20. We highlight that Ambuja’s standalone capacities operated at close to 81% utilization in 9MCY18.
ACC—realizations disappoint, energy cost increases after stellar 2QCY18
ACC’s earnings missed our and consensus estimates—the company reported revenues of Rs33.6 bn (+10% yoy, -11% qoq), EBITDA of Rs3.7 bn (+6% yoy, -31% qoq) and netincome of Rs2.1 bn (+16% yoy, -37% qoq) against our estimate of Rs34.5 bn, Rs5.5 bn and Rs3.3 bn respectively. Volumes increased 10% yoy to 6.6 mn tons (-10% qoq) and were higher than our estimate of 6.4 mn tons. EBITDA/ton declined 25% qoq to Rs538/ton (-4% yoy) largely due to a 2% qoq decline in realizations and cost increase. The company’s 3QCY18 earnings are weak compared to strong earnings reported in 2QCY18.
▶ Realizations decline 2% qoq in 3QCY18. The earning miss was largely due to lowerthan expected realizations, which declined 2% qoq to Rs4,760/ton against our estimate of a marginal increase. As per our checks, in 3QCY18 cement prices were up in Central and North region (40% of volumes) but declined in South, West (40% of volumes). We highlight that ACC’s 2QCY18 realizations increased 5% qoq to `4,840/ton and were higher than those of peers and our estimate.
▶ Energy cost rises after a decline in 2QCY18. Energy cost increased by 8% qoq to Rs1,110/ton in 3QCY18. We note that in 2QCY18, ACC’s fuel cost had declined by 1% qoq to Rs1,032/ton (+2% yoy) in contrast to the increase in pet-coke prices, weaker INR/US$. We believe ACC may have gained from low priced contracts, inventory in 2QCY18. ACC’s total cost increased 3% qoq to Rs4,570/ton (+1% yoy) due to high energy costs, other expenses.

Definitions of ratings

Our target prices are also on a 12-month horizon basis.

Other definitions

Coverage view. The coverage view represents each analyst's overall fundamental outlook on the Sector. The coverage view will consist of one of the following designations: Attractive, Neutral, Cautious.

Other ratings/identifiers

Copyright 2018 Kotak Institutional Equities (Kotak Securities Limited). All rights reserved.
1. Note that the research analysts contributing to this report may not be registered/qualified as research analysts with FINRA; and
2. Such research analysts may not be associated persons of Kotak Mahindra Inc and therefore, may not be subject to NASD Rule 2711 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
3. Any U.S. recipients of the research who wish to effect transactions in any security covered by the report should do so with or through Kotak Mahindra Inc and (ii) any transactions in the securities covered by the research by U.S. recipients must be effected only through Kotak Mahindra Inc at vinay.goenka@kotak.com.
This report is distributed in Singapore by Kotak Mahindra (UK) Limited (Singapore Branch) to institutional investors, accredited investors or expert investors only as defined under the Securities and Futures Act. Recipients of this analysis / report are to contact Kotak Mahindra (UK) Limited (Singapore Branch) (16 Raffles Quay, #35-02/03, Hong Leong Building, Singapore 048581) in respect of any matters arising from, or in connection with, this analysis / report. Kotak Mahindra (UK) Limited (Singapore Branch) is regulated by the Monetary Authority of Singapore.
Kotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India's largest brokerage and distribution house.
Kotak Securities Limited is a corporate trading and clearing member of Bombay Stock Exchange Limited (BSE), National Stock Exchange of India Limited (NSE), Metropolitan Stock Exchange of India Limited (MSE). Our businesses include stock broking, services rendered in connection with distribution of primary market issues and financial products like mutual funds and fixed deposits, depository services and Portfolio Management.
Kotak Securities Limited is also a depository participant with National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). Kotak Securities Limited is also registered with Insurance Regulatory and Development Authority as Corporate Agent for Kotak Mahindra Old Mutual Life Insurance Limited and is also a Mutual Fund Advisor registered with Association of Mutual Funds in India (AMFI). We are registered as a Research Analyst under SEBI (Research Analyst) Regulations, 2014.
We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in last five years. However SEBI, Exchanges and Depositories have conducted the routine inspection and based on their observations have issued advise/warning/deficiency letters/ or levied minor penalty on KSL for certain operational deviations. We have not been debarred from doing business by any Stock Exchange / SEBI or any other authorities; nor has our certificate of registration been cancelled by SEBI at any point of time.
We offer our research services to clients as well as our prospects.
This document is not for public distribution and has been furnished to you solely for your information and must not be reproduced or redistributed to any other person. Persons into whose possession this document may come are required to observe these restrictions.
This material is for the personal information of the authorized recipient, and we are not soliciting any action based upon it. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It is for the general information of clients of Kotak Securities Ltd. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients.
We have reviewed the report, and in so far as it includes current or historical information, it is believed to be reliable though its accuracy or completeness cannot be guaranteed. Neither Kotak Securities Limited, nor any person connected with it, accepts any liability arising from the use of this document. The recipients of this material should rely on their own investigations and take their own professional advice. Price and value of the investments referred to in this material may go up or down. Past performance is not a guide for future performance. Certain transactions -including those involving futures, options and other derivatives as well as non-investment grade securities - involve substantial risk and are not suitable for all investors. Reports based on technical analysis centers on studying charts of a stock's price movement and trading volume, as opposed to focusing on a company's fundamentals and as such, may not match with a report on a company's fundamentals.
Opinions expressed are our current opinions as of the date appearing on this material only. While we endeavor to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance or other reasons that prevent us from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein.
Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited.
We and our affiliates/associates, officers, directors, and employees, Research Analyst(including relatives) worldwide may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company/company (ies) discussed herein or act as advisor or lender / borrower to such company (ies) or have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of Research Report or at the time of public appearance. Kotak Securities Limited (KSL) may have proprietary long/short position in the above mentioned scrip(s) and therefore may be considered as interested. The views provided herein are general in nature and does not consider risk appetite or investment objective of particular investor; readers are requested to take independent professional advice before investing. This should not be construed as invitation or solicitation to do business with KSL. Kotak Securities Limited is also a Portfolio Manager. Portfolio Management Team (PMS) takes its investment decisions independent of the PCG research and accordingly PMS may have positions contrary to the PCG research recommendation. Kotak Securities Limited does not provide any promise or assurance of favourable view for a particular industry or sector or business group in any manner. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and take professional advice before investing.
The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.
No part of this material may be duplicated in any form and/or redistributed without Kotak Securities' prior written consent. Details of Associates are available on www.kotak.com
Research Analyst has served as an officer, director or employee of subject company(ies): No
We or our associates may have received compensation from the subject company(ies) in the past 12 months.
We or our associates have managed or co-managed public offering of securities for the subject company(ies) in the past 12 months: No
We or our associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received compensation or other benefits from the subject company(ies) or third party in connection with the research report. Our associates may have financial interest in the subject company(ies).
Research Analyst or his/her relative's financial interest in the subject company(ies): No
Kotak Securities Limited has financial interest in the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: Yes
Our associates may have actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report.
Research Analyst or his/her relatives has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No.
Kotak Securities Limited has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No
Subject company(ies) may have been client during twelve months preceding the date of distribution of the research report.
"A graph of daily closing prices of securities is available at https://www.nseindia.com/ChartApp/install/charts/mainpage.jsp and http://economictimes.indiatimes.com/markets/stocks/stock-quotes. (Choose a company from the list on the browser and select the "three years" icon in the price chart)."
Kotak Securities Limited. Registered Office: 27 BKC, C 27, G Block, Bandra Kurla Complex, Bandra (E), Mumbai 400051. CIN: U99999MH1994PLC134051, Telephone No.: +22 43360000, Fax No.: +22 67132430. Website: www.kotak.com/www.kotaksecurities.com. Correspondence Address: Infinity IT Park, Bldg. No 21, Opp. Film City Road, A K Vaidya Marg, Malad (East), Mumbai 400097. Telephone No: 42856825. SEBI Registration No: NSE INB/INF/INE 230808130, BSE INB 010808153/INF 011133230, MSE INE 260808130/INB 260808135/INF 260808135, AMFI ARN 0164, PMS INP000000258 and Research Analyst INH000000586. NSDL/CDSL: IN-DP-NSDL-23-97. Our research should not be considered as an advertisement or advice, professional or otherwise. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and the like and take professional advice before investing. Investments in securities market are subject to market risks, read all the related documents carefully before investing. Derivatives are a sophisticated investment device. The investor is requested to take into consideration all the risk factors before actually trading in derivative contracts. Compliance Officer Details: Mr. Manoj Agarwal. Call: 022 - 4285 8484, or Email: ks.compliance@kotak.com.
In case you require any clarification or have any concern, kindly write to us at below email ids:
● Level 1: For Trading related queries, contact our customer service at 'service.securities@kotak.com' and for demat account related queries contact us at ks.demat@kotak.com or call us on: Toll free numbers 18002099191 / 1800222299, Offline Customers - 18002099292
● Level 2: If you do not receive a satisfactory response at Level 1 within 3 working days, you may write to us at ks.escalation@kotak.com or call us on 022-42858445 and if you feel you are still unheard, write to our customer service HOD at ks.servicehead@kotak.com or call us on 022-42858208.
● Level 3: If you still have not received a satisfactory response at Level 2 within 3 working days, you may contact our Compliance Officer (Mr. Manoj Agarwal) at ks.compliance@kotak.com or call on 91- (022) 4285 8484.
● Level 4: If you have not received a satisfactory response at Level 3 within 7 working days, you may also approach CEO (Mr. Kamlesh Rao) at ceo.ks@kotak.com or call on 91- (022) 4285 8301.
First Cut notes published on this site are for information purposes only. They represent early notations and responses by analysts to recent events. Data in the notes may not have been verified by us and investors should not act upon any data or views in these notes. Most First Cut notes, but not necessarily all, will be followed by final research reports on the subject. There could be variance between the First cut note and the final research note on any subject, in which case the contents of the final research note would prevail. We accept no liability for the contents of the First Cut Notes. For further disclosure please view