Yet another miss!

Yet another miss!

The quarterly results of all the cement companies are out.
ICR
takes a view of the results from the investors´ perspective of top three companies. UltraTech has done a shed better than its rivals - ACC Ltd and Ambuja Cements.

ACC Ltd: Still waiting for a structural recovery
Numbers disappoint on volume growth and realisations - these were ~3 per cent lower than market estimates and a drag on Q3CY15 performance. Numbers are in line with consensus though. Costs remain in line with consensus expectations. Flat YoY volume growth is a disappointment, especially when its comparable peer UltraTech has delivered 5 per cent yoy domestic volume growth. There is no immediate trigger for ACC. The only near-term one is the commissioning of Jamul refurbishment, which could help recover volume growth. Priorities for LafargeHolcim (for the time being) are much broader; hence, a performance revival of its less efficient Indian entity seems distant.

Any material recovery in ACC´s structural operating performance is at least three quarters away. Volume growth (flat) disappoints as against expected 3 per cent), especially compared to UltraTech´s 5 per cent-definite operating performance disappointment. Realisations also improved only 2 per cent QoQ-poor performance vs. UltraTech´s 5 per cent. For 9MCY15, ACC´s blended realisation growth has been in line with peers, which suggest it can still recover pricing to compensate for loss in realisations to peers in Q3CY15. Volume estimates are cut for CY15/16 by 7 per cent to 6 per cent. Costs have remained in control despite provisioning for contingencies such as DMF. In the near term, ACC seems left with no other option but to recover on pricing in order to safeguard its valuations.

Outlook and valuation
Analysts maintain NEUTRAL call on ACC with a lower price target of Rs 1,458 (Rs 1,658 earlier) largely driven by lowered volume estimates and lower-than-expected realisations. ACC will continue to deliver a range-bound stock performance and no any major re-rating is expected for ACC. However, having said that, the valuations to re-rate marginally are expected driven by efficiency improvement once the consolidation process within LafargeHolcim´s Indian entities is complete.

Ambuja Cements: Missing the estimates
Ambuja Cements yet again missed the estimates as net earnings declined 36 per cent YoY to Rs 1.5 billion, which was 35 per cent below estimates. This was due to lower than expected realisations and higher costs (including a one-off). The analysts see Ambuja as a beneficiary of economic revival though one is unsure on parent LafargeHolcim´s India strategy, given the lack of announcements on new projects at a time when peers are expanding. Still the recommendation is BUY.

3Q performance below estimates
3Q EBITDA fell 22 per cent YoY to Rs 2.9 billion, a 14 per cent miss - even after adjusting for a prior-period item, there was a miss. Adjusted unit EBITDA of Rs 650/t was up 6 per cent QoQ but down 17 per cent YoY. Depreciation was much higher but other income, lower. Resultant net earnings fell 36 per cent YoY to Rs1.5 billion, which was 35 per cent below.

Lower than expected realisations
Weak macro and capacity constraints impacted volume growth which came in at 2 per cent YoY to 4.9 mt, a tad below the estimate. Net realisations grew 2 per cent QoQ to Rs 214/bag, which was a disappointment and a key reason for the earnings miss. Unit cost of production (material plus power & fuel) fell 5 per cent QoQ and freight costs declined 6 per cent QoQ - while this was partly on higher petcoke use, and lower fuel/oil prices, ICR is yet to fully understand the reason for the decline. Other expenses included a Rs 270 million prior-period charge towards DMF.

No visibility on expansion
Management again failed to comment on expansions - given rising lead times. It is difficult to predict about LafargeHolcim´s India focus, given the strong balance sheets of both - Ambuja and ACC. This is at a time when larger peers like UltraTech and Shree Cement have been looking for organic and inorganic opportunities. It is important to note, Holcim is yet to obtain approvals for its proposed transaction wherein Ambuja would become the holding company of ACC.

Trim estimates but beneficiary of revival
Analysts trim its EPS estimates by 15-18 per cent, lower volume and realisation estimates and tweak cost assumptions. Cut on target price to Rs 280/share based on 27x Sep-17CL earnings. Despite underinvestment by the parent, Ambuja will be a natural beneficiary of an economic revival though UltraTech is preferred in the large caps.

UltraTech: Power cost drives margin
Standalone revenues increased 4.5 per cent YoY (down 6.9 per cent QoQ) to Rs 5,620 crore (vs. indirect estimate: Rs 5,526 crore) due to 4 per cent YoY growth in volumes (led by capacity expansion) & 0.5 per cent YoY increase in realisations. EBITDA/tonne increased 7.6per cent YoY in Q2FY16 to Rs 834/tonne due to a decline in power & fuel costs as there was an increase in pet coke consumption (from 50 per cent to 65 per cent YoY in fuel mix). RM cost during the quarter increased due to DMF levy (30 per cent of royalty on limestone with effect from December 1, 2015).

UltraTech Cement is the largest player in capacity terms (~64.7 MT) with a market share of over ~18 per cent in India. The company has consistently remained ahead of its peers in terms of capacity expansion with a CAGR of 23 per cent vs. peer´s CAGR of 13 per cent in the past five years. In Q2FY16, UltraTech commissioned 1.6 mt grinding unit at Jhajjar, Haryana and 1.6 mt grinding unit at Dankuni, West Bengal. Further, with ongoing organic, inorganic expansion, total capacity is set to reach ~71 mt (consolidated capacity at 74.8 mt) by FY17E while industry capacity is expected to grow at a modest pace in the next three years.

Acquisition of Jaiprakash Associates´ 5 mt Madhya Pradesh asset has been delayed by six months due to provision on transfer of mines in the recently introduced MMR&D Act. The management expects clarity on these provisions/amendments by the government in next three months.

Largest pan-India player in cement industry
This, in turn, is expected to help the company further gain its leadership position, going forward. During the quarter, the company commissioned the 5 MW WHR plant taking total capacity of WHR plant to 53 MW. UltraTech plans to further add 5 MW of WHR plant by FY16, which will further help lower fuel cost in coming quarters. To benefit from strong demand recovery due to pan-India exposure, it is expected the company to grow at a higher rate than the industry in coming years led by capacity expansion. The same has also been reflected in the current quarterly results with volume growth of 4 per cent YoY. Further, given the likelihood of higher spending on infrastructure development coupled with a rebound in economic growth, strong demand recovery can be seen over the next three years. UltraTech, being the largest pan-India player, would be one of the major beneficiaries of a demand recovery. Healthy operating cash flow, low debt/equity to fuel expansion The company is expected to generate over ~| 4000 crore of operating cash flows annually and incur capex of Rs 3,900 crore annually. Further, considering the strong balance sheet of the company with minimal debt (D/E of 0.3:1), we believe the expansion plan will not add any stress to the balance sheet. This will consolidate the company´s position in the industry.

Well positioned to reap benefits of recovery in demand!
With the government´s focus on infrastructure and initiatives like smart cities, concretisation of roads, and housing for all, cement demand is expected to improve, going forward. We assign premium valuations multiple to UltraTech vs. its peer companies due to industry-leading growth (on the back of consistent capacity additions), higher margins and healthy cash flows. Hence, there is a positive view on the stock with a BUY recommendation and revised target price to | 3,600/share (i.e. At 14.0x FY17E EV/EBITDA and EV/tonne of $220/tonne).

Analysis
With lower lead distances due to a pan-India presence, captive power plants and higher sales realisations due to a higher trade mix coupled with higher white cement sales realisation, the company generates highest EBITDA/tonne in the industry. It has also been able to reduce its power consumption per tonne gradually through various initiatives. Power requirement of ~80 per cent is met through captive power plants, which helps the company in reducing per tonne cost. Other than this, the company also has increased pet coke consumption, which has helped in reducing power cost. Expect revenue CAGR of 19.5 per cent during FY15-17E revenues have grown at a CAGR of 14.4 per cent in FY11-15 mainly led by higher realisations (CAGR of 7.3 per cent ). However, due to higher capacity addition, we expect expansion led revenue CAGR of 19.5 per cent in FY15-17E. The company is well on track on the capacity expansion front and will likely remain ahead of its target of 71 mt by FY17E (including the Jaiprakash Associate´s deal).

Margins to improve but excess capacity in industry to limit expansion Given the expected recovery in demand, we expect industry operating margins to improve at a faster pace due to high operating leverage. However, we expect the benefit to start flowing in from FY16E onwards with some moderation in operating costs due to lower fuel cost advantage along with healthy demand recovery. This, in turn, would help the company in achieving over 22 per cent margins by FY17E.

Source Philips Capital

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