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Rising fuel cost headwind to potential earnings

Result Synopsis Ambuja Cements (ACEM) reported EBITDA/te of Rs926 (v/s YSEC est. of Rs995) declined by 12% q/q, was largely due to the substantial increase in power cost/te by Rs410 q/q (Rs558 y/y) to Rs1786/te in Q2CY22. Due to inflated power cost (+30% q/q) along with freight (+6% q/q) & other exp (+10% q/q), the total cost inched up  by +7% q/q (+19% y/y) in Q2CY22, while abrupt decline in RM cost by 39% q/q (+60% y/y) cushioned the margin partially. ACEM posted +15% y/y volume growth in Q2CY22, while declined by 1% q/q as demand unable to sustain at high price. In recent years, ACEM narrowed the efficiency gap with its peers by adopting cost?effective measures like 1) higher volumes & optimized lead distance under MSA 2) optimizing fixed costs & specific energy consumption under ‘Parvat’. Furthermore, the efficiencies are expected to improve through 1) upcoming WHRS & RE capacities (~112MW or ~28% of energy from WHRS & RE by CY22E), 2) ramping up in AFR usage (targeting ~25%), 3) Higher blending ratio (~89% currently). ACEM’s ongoing expansion of 1.5MTPA at Ropar is expected to commission by end of CY23E, which will provide production headroom (currently utilization at +95% v/s 86% CY21). Additionally, ACEM to invest Rs35bn ($66/te) for potential ~7MTPA expansion plan in the eastern market to restrict the incremental market?share loss due to slower capacity addition. ACEM aims for ~50MTPA over mid?term through debottlenecking in western market.  At CMP, stock trades at 17/13x on EV/EBITDA for CY22/23E and we recommend ‘NEUTRAL’ rating, valuing ACEM on SOTP based valuation with standalone entity valued at 14x EV/EBITDA and ACEM’s stake in ACC at 10x EV/EBITDA on CY23E by adding Rs93bn net cash arrived at TP of Rs390.

Result Highlights

* ACEM reported volume of 7.4MT (?1% q/q and +15% y/y; v/s YSEC est. 7.2MT) and in?line NSR of Rs5404/te (+3% q/q & y/y) translates in revenue of Rs39.9bn (+2% q/q and +19% y/y) in Q2CY22.

* EBITDA declined by 13% q/q & 29% y/y to Rs6.85bn (v/s YSEC est. of Rs7.16bn) due to increase in total cost/te by +7% q/q and +19% y/y (power/te surged by +30% q/q & +46% y/y to Rs1786) in Q2CY22.  

* Reported EBITDA/te of Rs926 declined by 12% q/q and 38% y/y (v/s YSEC est. of Rs995) and EBITDA margin stood at 17.1% v/s 20.1% q/q & 28.5% y/y in Q2CY22.

* ACEM reported other income (dividend from ACC) of Rs6.3bn in Q2CY22 v/s 364mn Q1CY22 took PAT to Rs10.5bn, up by 2x q/q & +50% y/y in Q2CY22.

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