Ambuja Cements’ results for Q2’09 were a mixed bag. While net sales grew by 18.2% y-o-y led by a healthy growth in sales volumes and realisations, the EBITDA margin declined by 248 bps y-o-y and the adjusted net profit fell 3.7% y-o-y.
Cement demand has been growing at a robust rate of 9–12% over the last few months, and the trend is likely to continue with the increase in infrastructure spending and the ongoing recovery in the housing sector.
However, as the Cement industry plans to add ~50 mt of capacity in 2009–10, the incremental capacity is likely to be higher than incremental demand, and an excess supply scenario would be inevitable. Thus, the currently strong realisations are likely to come under pressure from Q4’09 onwards.
The shutdown of a clinker plant for repairs during Q2’09 dragged down Ambuja’s margins during the quarter.
However, the effect of the above is likely to be marginally negated by the expansion of clinker capacity (by 2.2 mt in Q4’09), the cost savings from the expansion of captive power capacity (CPC), as well as a likely 3–4% y-o-y growth in realisations.
Consequently, the consolidated EBITDA margin is expected to improve by 54 bps y-o-y to 29.4% in CY09. In CY10, while realisations are expected to moderate due to oversupply build-up. Thus, the margin is expected to decline by 44 bps to 29.0% in CY10.
We have arrived at a fair value estimate of Rs. 92 per share for Ambuja using a combination of DCF-methodology, relative valuation, and replacement cost.
Our fair value estimate reflects a 10.4% downside from the current market price; thus we maintain our SELL rating.