India’s three cement bigwigs — UltraTech, ACC and Ambuja Cements — have reported strong performance on the bourses since end-May. UltraTech has led with returns of close to 42 per cent, while Ambuja delivered about 31 per cent and ACC around 23 per cent. This is led by improving prices, better demand and delay in monsoons, helping the cement majors post strong year-on-year growth in revenues and profitability for the quarter ending September. Going ahead, analysts are positive on their prospects but are more bullish on UltraTech, given better revenue visibility and the overhang on ACC and Ambuja due to speculation over increase in royalty outgo to their parent, Holcim. However, if the royalty issue doesn’t materialise, it could provide a trigger, especially for ACC.
Realisations to remain firm
With the monsoons having ended, prices have begun improving. According to channel checks by Elara Capital, these rose by Rs 9-25 per bag (of 50 kg) in Lucknow, Jaipur, Bhopal and Delhi in October. Though the south is seeing weakness, prices might catch up there too. Analysts at Edelweiss expect hikes of Rs 5-15 a bag in most regions. Higher realisations should negate the rise in transportation cost, which otherwise is being negated by a fall in global coal prices and rupee rise.
Royalty issue for ACC, Ambuja
A concern for ACC and Ambuja comes from speculation that the duo will have to pay two per cent royalty to their parent, Holcim, in lieu of technology sharing, against 0.5 per cent now. While no confirmation has come, analysts at Bank of America-Merrill Lynch say in many markets across Asia, Holcim’s subsidiaries pay 1-1.2 per cent of net sales as technical fees and an additional 0.7 per cent of net sales as fee for using Holcim trademark. In case they have to pay higher royalty, their earnings will be hit by 9-19 per cent, said Rakesh Arora at Macquarie. Investors will have watch out.
| HOW THEY STACK UP | |||
| In Rs crore | UltraTech FY12 | Ambuja FY13E | ACC FY14E |
| Cement vol (mt) | 9.29 | 4.79 | 5.4 |
| % change y-o-y | 0.7 | -0.4 | -5.1 |
| Realisation/tn | 420.8 | 452.9 | 452.7 |
| % change y-o-y | 20.3 | 20.6 | 19.8 |
| Net sales | 4,700 | 2,168 | 2,445 |
| % change y-o-y | 20.3 | 20.1 | 13.7 |
| Ebitda | 1,007 | 565 | 435 |
| Ebitda (%) | 21.4 | 26.1 | 17.8 |
| Adjusted net profit | 550 | 337 | 249 |
| % change y-o-y | 97.2 | 96.6 | 48.4 |
| FY14E/CY13E PE | 17.3 | 17.3 | 18.9 |
| ACC & Ambuja follow Jan-Dec financial year and UltraTech’s year ends in March; E: Estimates Source: Motilal Oswal Research | |||
Meanwhile, with grey cement realisations per tonne at Rs 4,203 (up 20 per cent year-on-year (YoY) and two per cent sequentially) and cement volumes stable, UltraTech saw good revenue, and profitability growth in the September quarter. With largest capacity of 52 million tonnes per annum (mtpa), it is continuing with further expansions. It plans to enhance capacity by 10.2 mtpa by early FY14. Analysts at Religare believe UltraTech would be a major beneficiary of an expected pick-up in cement volumes in the next two-three years. Aided by healthy realisations, its performance is likely to remain strong in the coming quarters.
Ravi Sodah at Elara Capital says at current prices, UltraTech is trading at (enterprise value) $164 a tonne on FY14 capacity. The stock is still trading at a 12 per cent discount to Ambuja ($185 a tonne), despite strong volume growth visibility for the next few years.
Hence, Sodah has an ‘Accumulate’ rating on the stock. Hence, most analysts have raised target prices (post results) for the stock (at Rs 2,022) to Rs 2,200 plus.
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Ambuja Cements
Ambuja being a regional player has benefited, having negligible exposure to weak southern markets. While cement volumes were flat, average per bag prices in northern, central and western India stood between Rs 286 and Rs 297 in the September quarter (up 19-25 per cent YoY and three-six per cent sequentially). Thus, Ambuja’s realisations at Rs 4,529 a tonne increased 20.6 per cent YoY. Moving forward, Ambuja’s favourable market mix, well-diversified fuel mix and efficient operations should translate into above-average profitability, say analysts at Motilal Oswal. The improving outlook for the sector should also help deliver healthy performance . However, the stock is trading at a premium to historical average valuations, as well as peers. And, given the royalty issue, these could limit upsides in the near term.
ACC
Though cement sales volumes in the quarter were expected to remain subdued, ACC negatively surprised the Street with volumes down five per cent YoY. Analysts owe this to capacity constraints as its latest expansions were in the south, which is seeing mixed fortunes. Overall, analysts remain ‘Neutral’ on the stock.
While ACC, too, should benefit from healthy demand and improving realisations, one needs to monitor the trend in the south. With the last capacity additions completed, any demand improvement there should translate to improving performance by ACC. For now, ACC is concentrating on capacity additions in the high-growth east. The benefits of capacity expansion might accrue later. At Rs 1,420, analysts at Elara say ACC is trading at an EV of $141 a tonne, based on CY13 capacities. While it is trading at a discount to Ambuja and UltraTech, there is scope for upside if the royalty overhang subsides.