Industry volumes up 12% in Q3FY18
Industry volumes up 12% in Q3FY18

Industry volumes up 12% in Q3FY18

Edelweiss Research expects strong volume growth trend to extend into Q4FY18 as well, aided by low base and foresee margins to improve.
Majority of our coverage companies reported volumes ahead of estimates, while realisations belied our forecast, making it the underlying theme for Q3FY18, said Edelweiss Research in its Q3FY18 (October-December 2017 quarter of 2017-18) Earnings Review. Except for UltraTech Cement (UTCL, undertook maintenance shutdown for the acquired JP Associates' assets), EBITDA of coverage companies surpassed estimates on controlled costs, said the authors lead by Prateek Parekh. While variable costs per tonne stood largely in line, drop in other expenses aided out performance.
Adjusted for acquisitions, volume of our universe grew approximately 16 per cent YoY versus approximately 12 per cent YoY for industry. UTCL surprised the most with approximately 17 per cent YoY (versus (versus estimate 8 per cent) volume growth (adjusted for JP Associates' acquisition) followed by ACC (27 per cent versus 20 per cent estimate), implying increase in market share. We expect this strong volume growth trend to extend into Q4FY18 as well, aided by low base and foresee margins to improve (despite further jump in fuel cost) following improvement in realisations owing to busy season. We remain positive on industry in view of rising clinker utilisation rates. UTCL and India Cements are our top picks.
Key highlights:
Net sales (up 30 per cent YoY) were ahead of our estimate on strong volumes. Low base (down 9.2 per cent YoY) in Q4CY16 along with ramp up of new plants at Jamul and Sindri (commissioned in September-October 2016) led to 27 per cent YoY growth in volumes. However, net realisation at Rs 4,569 per tonne, dipped 3.5 per cent QoQ versus our estimate of 1.5 per cent drop. Reported EBITDA of Rs 4.4 billion, surged 55 per cent YoY and surpassed our estimate of Rs 3.5 billion. EBITDA per tonne stood at Rs 528 versus Rs 409 in Q4CY16.
Key highlights:
Q3FY18 numbers are not comparable with Q3FY17 as last year numbers do not include the recently merged Aditya Birla Nuvo's (ABNL) financials. VSF revenue (including VFY from ABNL) rose 24 per cent YoY led by 13 per cent growth (9 per cent excluding VFY) in volumes and 10 per cent in realisations (flat QoQ). VSF's EBITDA stood at Rs 4.6 billion, up 15 per cent YoY with margins of 21 per cent compared to 23 per cent in Q3FY17 and 22 per cent in Q2FY18. Chemical volumes (including ABNL) were up 17 per cent YoY with realisations growing 22 per cent YoY (up 16 per cent QoQ). Consequently, chemical margin rose 300bps QoQ to 27 per cent (20 per cent in Q3FY17). Standalone EBITDA of Rs 8.7 billion stood ahead of our Rs 7.4 billion estimate.
Key highlights:
Net revenue of Rs 12.1 billion (3 per cent below our estimate), dipped 4 per cent YoY on flat volumes YoY and 5.5 per cent QoQ drop in realisations. However, significant reduction in fixed costs (down 24 per cent YoY) due to managements efforts to close unviable divisions, manpower rationalisation (and related policy changes) and controlled overhead and (and related policy changes) and controlled overhead and advertisement expenses aided EBITDA beat in Q3FY18. Reported EBITDA at Rs 1.7 billion, down 19 per cent YoY, was ahead of our Rs 1.4 billion estimate. Blended EBITDA/t stood at approximately Rs 614 (down approximately 19 per cent YoY) versus our Rs 507 estimate.
Key highlights:
Net revenue (up 24 per cent YoY) was ahead of our estimate, led by grey cement segment that clocked strong performance. Grey cement volumes rose 18 per cent YoY (versus our estimate of 15 per cent), while blended realisation dipped just 3 per cent QoQ (versus our 1 5 per cent estimate). Total volumes, including clinker, grew ~22 per cent YoY - a good number given the Supreme Court's (SC) ban order on sand mining in Rajasthan. Led by lower than estimated realisations, grey cement EBITDA/t stood lower at Rs 376 (down 16 per cent YoY) compared to Rs 414 estimate. White cement + wall putty volumes grew 12 per cent YoY with realisation growth of 3 per cent QoQ. Segment EBITDA at Rs 941mn, dipped a mere 2 per cent YoY despite the company switching to costlier fuel LDO (2.5x costlier than pet coke) following SC's ban on usage of pet coke in Rajasthan for almost half of the quarter.
Blended EBITDA/t stood at approximately Rs 676, down 12 per cent YoY and ahead of our estimate of Rs 627.
Key highlights:
Net revenue (up 23 per cent YoY) came in line with our estimate with pure cement volume jumping 9 per cent YoY with realisation dipping 0.7 per cent QoQ (in line). Including clinker, total sales volumes grew 8 per cent YoY. On cost front, while variable cost/t was in line, other expenses at Rs 3.2 billion (Rs 3.6 billion after adjusting Rs 403 million of DMF reversal), down 15 per cent YoY, came in much below our estimate of Rs 4.1 billion. Ergo, reported EBITDA of Rs 5.7 billion was much ahead of Rs 5.0 billion estimate. Cement EBITDA/t stood at Rs 1,080 (Rs 1,018 in Q3FY17) and ahead of our Rs 918 estimate.
Key highlights:
Net revenue (up 35 per cent YoY) stood 4 per cent above estimate with volumes at approximately 15.9mt (up 35 per cent YoY and 8 per cent ahead of 14.7 MT estimate) and realisation of Rs 4,287 (down 3.7 per cent QoQ versus estimate of 2 per cent drop). On YoY basis, numbers are not comparable due to consolidation of acquired JPA assets. Excluding same, we believe volume growth was in mid-teens YoY. With inline variable cost/t and higher-than-estimated fixed cost (primarily other expenses), EBITDA/t stood at Rs 801, ahead of our Rs 937 estimate.
Cement sector - Summary Positive highlights   
1.    Better than estimated volume growth
2.    Lower than expected other expenses
Negative highlights/concerns/risks
1.    Lower than anticipated realisations
Top picks:
UltraTech Cement, India Cements
Ambuja & ACC call off merger

Edelweiss Research expects strong volume growth trend to extend into Q4FY18 as well, aided by low base and foresee margins to improve.
Ambuja Cement (ACL) has put on hold its plan to merge with 50.1 per cent subsidiary ACC recently citing 'some constraints', while an arrangement to trade materials and services with ACC to maximise synergies has been approved. Both the Indian units of LafargeHolcim, however, said that merger 'remains their ultimate objective'.
'On the basis of a comprehensive evaluation carried out by both the special committee and Board of Directors of the company, the board is of the opinion that there are at present certain constraints in implementing a merger between the company and Ambuja Cements Ltd (ACL),' ACC press release said.
'In the meantime, with intention to maximise synergies between the companies and to unlock value for the shareholders, the board has approved an arrangement with ACL for mutual purchase and sale of materials and services,' it added. ACL also made a similar looking filing with the stock exchanges. Both the stocks closed a percentage point on the day of the news break.
In a post announcement note, Edelweiss Securities Limited's (ESL) analyst Navin Sahadeo termed the calling off of merger for now as 'sentimental negative' for the companies 'as the merger was expected to expedite accrual of claimed synergies.'
'While conservatively we had not factored in synergy benefits in our estimates, putting the merger on back burner is nonetheless disappointing as it was envisaged to expedite accrual of claimed synergies' ESL added.
'In our view, the currently not-so lucrative cost-benefit dynamics (tangible synergy gains versus cost of mines transfer fee and transaction cost) could have led to the development, even as we await clarity from management,' Sahadeo pointed out.
With limited visibility on merger, ESL has valued ACL's stake in ACC at 30 per cent holding company discount (20 per cent earlier) even as it continued to value ACL and ACC at 14x CY19E EV/EBITDA (Enterprise Value to Earnings Before Interest Taxes, Depreciation and Amortisation), while maintain 'HOLD' with a revised target price of Rs 280 (Rs 290 earlier).
Both the stocks posted around one percentage point gain each on the day of announcement. Both ACC and ACL became parts the Holcim group in 2005. Following the merger of Holcim Limited with Lafarge SA in 2015, a new entity LafargeHolcim was created to become the world's largest cement producer.
Merger milestones
i)    July 2013: ACEM proposes restructuring to make ACC its 50.1 per cent subsidiary. Claims synergy potential of $120-150 million for ACC & ACEM combined over two years;
ii)    August 2016: FIPB approves restructuring;
iii)    May 2017: ACEM and ACC set up a Special Committee to explore merger possibilities; and
iv)    February 2018: Merger shelved.
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