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Fuel costs dents profitability

Ambuja Cement (ACEM) reported in-line standalone EBITDA of Rs6.8bn, (CentrumE: Rs6.6bn), though down 13% QoQ/ down 29% YoY and blended EBITDA/t of Rs926, down 12% QoQ/ down 38% YoY. The sequential decrease in EBITDA was primarily due to higher power & fuel cost and freight cost partially offset by increase in cement realisation. Thermal coal prices are holding high leading to further increase in cost and with lower demand amid monsoon, profitability is expected to affect adversely further in Q3CY22. It is on verge of expanding WHRS capacity by 54MW (by Q3CY22-end), taking total capacity to 87MW which will help to reduce power cost. We believe the focus of Adani group will be to reduce CoP and continued expansion at ACEM (expanding capacity by 8.5mtpa by CY24). We reduce CY22E/CY23E EBITDA by 8%/6% to factor in higher fuel cost. This led to decline in TP too. We value ACEM based on SOTP (16x CY23E standalone EV/EBITDA + value of 50.05% stake in ACC) and arrive at TP of Rs424 (earlier Rs480). Reiterate BUY.

Revenue marginally up QoQ on higher realization

ACEM recorded standalone net sales of Rs39.9bn, up 1.7% QOQ/18.5% YoY driven by higher realisation offset by marginal decrease in sales volume. Sales volume (Cement & clinker) at 7.39mt decreased marginally by 1.3% QoQ/ up 15% YoY. Blended cement realization at Rs5,404, up 3.1% (Rs163/t) QoQ/2.9% (Rs153//t) YoY. As demand is likely to remain subdued in Q3CY23, realisation/t is expected to remain flat QoQ.

Higher CoP led to fall in margins; EBITDA/t of Rs926, down 12% QoQ

Cement Cost/t, at Rs4,478, was up 7% QoQ/up 19.2% YoY. On QoQ basis, the rising thermal coal prices led to Rs410/t (~30%) QoQ increase in power and fuel cost/t. The benefits of master supply agreement with its subsidiary restrict logistics cost with lower lead distance and as a result, Freight cost/t at Rs1,224, though was up 5.6% QoQ but remained flat YoY despite higher diesel prices. Overall, higher CoP led EBITDA to decrease 13% QoQ to Rs6.8bn. EBITDA/t, at Rs926, decreased by 12% (Rs129/t) QoQ/38% (Rs568/t) YoY.

In process of increasing capacity by ~8.5mtpa by CY24

ACEM expansion projects are progressing well. At Ropar, Punjab capacity expansion of 1.5mtpa grinding unit (capex of Rs3.1bn) is on track. It is expected to be commissioned by CY23. It is also setting up integrated facility with 3.2mtpa brownfield clinker capacity and total of 7mtpa grinding cement capacity of which 3mtpa greenfield project at Barh in Bihar and rest at existing location of Sankrail and Farakka. We expect additional 7mtpa capacity to be commissioned by CY24 taking overall capacity to 40mtpa. We will await more clarity on future capacity expansion plans once Adani group formally takes over

Reiterate BUY, awaiting Adani’s move to reduce CoP

Though Q3CY22 earnings will be hit further owing to higher power & fuel cost, lower volumes due to seasonality and inability to raise cement prices, we would wait for the move (pricing as well as cost rationalisation) to be taken once Adani group takes over. We reiterate BUY with target price of Rs424.

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