RESULTS REVIEW 2QCY13

25 JUL 2013

Ambuja Cements
SELL
INDUSTRY CMP (as on 24 Jul 2013) Target Price
Nifty Sensex KEY STOCK DATA Bloomberg/Reuters ACEM IN/ABUJ.BO No. of Shares (mn) MCap (Rs bn) / ($ mn) STOCK PERFORMANCE (%) 52 Week high / low Absolute (%) Relative (%) Promoters FIs & Local MFs FIIs Public & Others
Source : BSE

CEMENT Rs 191 Rs 170

5,991 20,091

No sweet deal

Holcim has initiated a transaction which will result in Ambuja Cements holding a 50% stake in ACC and Holcim with a 61% stake in Ambuja Cements. Boards, marketing team and dealer network will continue to remain separate. Effectively, Holcim has managed to transfer Ambujas cash (Rs 35bn) to its own books. The transaction happened at CMP for both entities (details on next page) implying a valuation of US$ 110/t for ACC. We feel that minority shareholders of both ACC and Ambuja end up losing in the deal. We are very skeptical of the synergies being talked about (Rs 9bn over 2 years). While the transaction will take place at CMP, ACC stake
will be ascribed a holdco discount straightaway, resulting in a loss of value for Ambuja shareholders. Further, exposure to ACC becomes a necessity, which is a lower profitability business. We believe that a holdco discount of 35-40% is possible given the precedent of Grasim and UltraTech. Ceteris Paribus, this would mean a valuation loss of ~Rs40-45bn for the combined entity (~Rs20-23/sh on expanded share capital).
2QCY13 23,457 4,920 3,242 2.11 2QCY12 25,660 7,223 4,689 3.06 YoY (%) (8.6) (31.9) (30.9) (30.9)

While nothing changes on paper for ACC shareholders, the valuation is below current replacement cost.

No changes on ground : Boards, marketing and

1,544 295 / 4,994 461

dealer network continue to remain separate for both companies. Holcim will continue to maintain the two brands separately. We do not think the transaction would result in any meaningful synergies. Holcim has held both companies for 7 years in their current form and most synergies should have been exploited.

6m avg traded value (Rs mn)

Rs 223 / 162 6M (3.1) (3.9) 12M 13.7 (5.0) 50.55 10.23 28.71 10.51

2QCY13 results inline, we revise EBITDA downwards by ~23%/~21% for CY13/14 to account for extremely weak Q2 and current cement market scenario. valuations (US$ 110/t) does not benefit minority shareholders of either ACC or Ambuja. Given weak macro and expectations of earnings downgrade, both stocks are expensive (9-11x EV/EBITDA 1 Yr Fwd). The deal would result in a value destruction of ~Rs40-45bn on account of holdco discount. Recommend SELL with a TP of Rs170/sh (8.5X FY15 EBITDA).

3M 2.8 (2.0)

Valuations and view : The deal, despite inexpensive

SHAREHOLDING PATTERN (%)

FINANCIAL SUMMARY
(Rs mn) Net Sales EBITDA PAT Diluted EPS (Rs) P/E (x) EV / EBITDA (x) RoE (%) 1QCY13 25,448 5,119 3,139 2.05 QoQ (%) (7.8) (3.9) 3.3 3.3 CY11 85,043 19,979 12,531 7.7 CY12E 96,749 25,143 15,762 10.2 19.6 9.5 18.7 CY13E 100,325 19,239 11,757 7.6 22.2 12.1 12.7 CY14E 117,988 24,964 16,246 10.5 16.1 9.0 15.9

Ankur Kulshrestha ankur.kulshrestha@hdfcsec.com +91-22-6171-7346

Source: Company, HDFC sec Inst Research

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters

AMBUJA CEMENTS : RESULTS REVIEW 2QCY13

Deal structure
Ambuja buys from Holcim an entity which holds

9.76% in Ambuja Cement (Market Cap: Rs 295bn) 50.05% stake in ACC (Market cap:Rs 231bn) The total value of the entity is Rs 144.5bn

Share capital expanded from 1,545 mn to 1,978 mn.(Adjusted for 9.76% shares bought back from Holcim

So what changes?

Total consideration Rs 35bn for 24% stake Issue of 584mn new shares for a total implied value of Rs109.8bn (~Rs190/sh, or CMP)

No change to ACC Ambuja's holding in ACC will be at some holdco discount The combined entity will trade at ~10.5x Fy13 EV/EBITDA and US$110 (Assuming 40% holdco discount) for ACC

How Ambuja will look like post this transaction

Becomes the holdco of ACC, to consolidate ACC, just like Holcim does

QUARTERLY FINANCIALS SNAPSHOT

(Rs mn) Net Sales Power & Fuel Freight Expenses RM Costs Other Operating Expenses EBITDA Other operating income Other Income Interest Cost Depreciation PBT Tax RPAT E/o (adj for tax) APAT
Source: Company, HDFC sec Inst Research

2QCY13 23,457 5,560 6,142 1,655 5,180 4,920 308 744 171 1,223 4,578 1,336 3,242 3,242

2QCY12 25,660 5,991 4,387 3,230 4,829 7,223 125 783 180 1,215 6,736 2,047 4,689 4,689

YoY (%) (8.6)

(31.9)

(32.0) (30.9) (30.9)

1QCY13 25,448 5,740 4,983 3,229 6,379 5,119 122 1,217 132 1,204 5,691 811 4,879 1,740 3,139

QoQ (%) (7.8)

(3.9)

(19.6) (33.6) 3.3

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AMBUJA CEMENTS : RESULTS REVIEW 2QCY13 PER TONNE ANALYSIS

Per tonne data Volumes (mT) Realisations (Rs/T) P&F costs (Rs/T) Freight costs (Rs/T) RM costs (Rs/T) Cement EBITDA/T (Rs/t)
Source: Company, HDFC sec Inst Research

2QCY13 5.4 4,360 1,033 1,142 308 915

2QCY12 5.5 4,632 1,081 1,060 315 1,304

YoY (%) (2.9) (5.9) (4.4) 7.7 (2.3) (29.9)

1QCY13 5.8 4,388 990 1,112 304 883

QoQ (%) (7.2) (0.6) 4.4 2.7 1.2 3.6

CHANGES TO ESTIMATES
Old CY13E 23.3 4,599 107,066 25,041 15,730 CY14E 25.4 4,984 126,817 31,644 20,881 New CY13E 22.8 4,401 100,325 19,239 11,757 CY14E 24.4 4,833 117,988 24,964 16,246 % Change CY13E (2.2) (4.3) (6.3) (23.2) (25.3) CY14E (3.9) (3.0) (7.0) (21.1) (22.2)

Volumes (mT) Realisations (Rs/T) Revenues (Rs mn) EBITDA (Rs mn) PAT (Rs mn)
Source: Company, HDFC sec Inst Research

VALUATION MATRIX

The stock trades at US$ 150/t

Company UltraTech Cement Ambuja Cements ACC Shree Cement

CMP Rs 1,919 191 1,231 4,419

MCap Rs bn 528.1 293.8 231.6 154.0

EV/EBITDA (x) FY14E 10.7 13.9 9.7 7.0 FY15E 9.2 10.3 9.0 5.6 FY14E 18.2 25.0 17.0 15.5

P/E (x) FY15E 16.7 18.1 15.5 12.6 164 150 111 110

EV/T (US$) FY14E FY15E 156 147 111 93

Note: Prices as of July 24, 2013 close. US$: INR = 60.0

KEY ASSUMPTIONS
(Rs mn) Cement volumes (mn T) Realisations (Rs/t) Cement EBITDA/t (Rs) P&F costs (Rs/t) Freight cost (Rs/t) RM Costs (Rs/t)
Source: Company, HDFC sec Inst Research

CY11 21.45 3,929 961 487 678 898

CY12E 21.98 4,402 1,077 571 770 1,100

CY13E 22.80 4,401 1,011 620 883 797

CY14E 24.42 4,833 1,096 667 952 975

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AMBUJA CEMENTS : RESULTS REVIEW 2QCY13

Volumes continue to remain weak

Sales volume (mT) 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 mnT YoY % 14.0 12.0 10.0 8.0 6.0 4.0 2.0 (2.0) (4.0) (6.0)

No realisation cheer either

Realisation per tonne (Rs) 5,000 4,500 4,000 3,500 3,000 Rs/T YoY (%) % 30.0 20.0 10.0 0.0 -10.0

3QCY09 4QCY09 1QCY10 2QCY10 3QCY10 4QCY10 1QCY11 2QCY11 3QCY11 4QCY11 1QCY12 2QCY12 3QCY12 4QCY12 1QCY13 2QCY13

Source: Company, HDFC sec Inst Research

Source: Company, HDFC sec Inst Research

Disappointing performance, led by weak prices

EBITDA/tonne 1,500 Rs/T YoY (%) % 120.0 100.0 80.0 60.0 40.0 20.0 0.0 -20.0 -40.0 -60.0

P&F costs aided profitability

3,000 2,500 2,000 1,500 1,000 500 Rs/T P&F Freight RM

1,000

500

Source: Company, HDFC sec Inst Research .

3QCY09 4QCY09 1QCY10 2QCY10 3QCY10 4QCY10 1QCY11 2QCY11 3QCY11 4QCY11 1QCY12 2QCY12 3QCY12 4QCY12 1QCY13 2QCY13

Source: Company, HDFC sec Inst Research

3QCY09 4QCY09 1QCY10 2QCY10 3QCY10 4QCY10 1QCY11 2QCY11 3QCY11 4QCY11 1QCY12 2QCY12 3QCY12 4QCY12 1QCY13 2QCY13

3QCY09 4QCY09 1QCY10 2QCY10 3QCY10 4QCY10 1QCY11 2QCY11 3QCY11 4QCY11 1QCY12 2QCY12 3QCY12 4QCY12 1QCY13 2QCY13

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AMBUJA CEMENTS : RESULTS REVIEW 2QCY13

INCOME STATEMENT
Year ending December (Rs mn) Revenue Growth % Raw Material Expenses Employee Expenses SG&A Expenses Other operating expenses Operating profits Operating Profit Margin (%) Other operating income EBITDA EBITDA % EBITDA Growth % Other Income Depreciation EBIT Interest E/O items PBT Tax PAT EO items (net of tax) APAT APAT Growth (%) EPS EPS Growth (%)
Source: Company, HDFC sec Inst Research

BALANCE SHEET
CY11 85,043 15.1 39,197 4,332 19,246 2,998 19,270 22.7 709 19,979 23.5 2.5 2,270 4,452 17,797 526 (243) 17,028 4,740 12,288 (243) 12,531 1.3 7.7 (1.6) CY12 96,749 13.8 42,617 4,785 21,664 3,508 24,176 25.0 967 25,143 26.0 25.8 3,076 5,652 22,566 757 (2,791) 19,018 6,048 12,971 (2,791) 15,762 25.8 10.2 32.3 CY13E 100,325 3.7 47,140 5,981 25,412 3,616 18,176 18.1 1,063 19,239 19.2 (23.5) 2,931 5,326 16,845 49 0 16,795 5,039 11,757 11,757 (25.4) 7.6 (25.3) CY14E 117,988 17.6 54,421 6,879 28,917 3,977 23,794 20.2 1,170 24,964 21.2 29.8 3,750 5,456 23,258 49 0 23,209 6,963 16,246 16,246 38.2 10.5 38.2 Year ending December (Rs mn) SOURCES OF FUNDS Share Capital Reserves Total Shareholders Funds Long Term Debt Short Term Debt Total Debt Deferred Taxes Long Term Provisions & Others TOTAL SOURCES OF FUNDS APPLICATION OF FUNDS Net Block CWIP Investments, LT Loans & Advances Inventories Debtors Cash & Equivalents ST Loans & Advances, Others Total Current Assets Creditors Other Current Liabilities & Provns Total Current Liabilities Net Current Assets TOTAL APPLICATION OF FUNDS
Source: Company, HDFC sec Inst Research

CY11 3,069 77,625 80,694 428 66 494 6,436 218 87,842 61,865 4,868 5,725 9,250 2,409 28,676 2,626 42,960 9,512 18,066 27,577 15,383 87,841

CY12 3,084 84,966 88,050 346 82 428 5,482 258 94,219 58,624 5,201 7,297 9,839 2,134 38,272 2,880 53,125 9,345 20,682 30,028 23,097 94,219

CY13E 3,084 93,300 96,384 296 0 296 5,482 258 102,421 55,798 7,701 7,297 9,955 2,220 47,476 2,880 62,531 10,135 20,772 30,907 31,624 102,420

CY14E 3,084 104,816 107,900 246 0 246 5,482 258 113,887 52,843 15,201 7,297 13,324 2,900 53,432 2,880 72,537 12,775 21,216 33,991 38,545 113,886

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AMBUJA CEMENTS : RESULTS REVIEW 2QCY13

CASH FLOW
Year ending December (Rs mn) Reported PAT Non-operating & EO items PAT from Operations Interest expenses Depreciation Working Capital Change OPERATING CASH FLOW ( a ) Capex Free cash flow (FCF) Investments INVESTING CASH FLOW ( b ) Share capital Issuance Debt Issuance Interest expenses Dividend FINANCING CASH FLOW ( c ) NET CASH FLOW (a+b+c) Non-operating and EO items Closing Cash & Equivalents
Source: Company, HDFC sec Inst Research

KEY RATIOS
CY11 12,288 (1,851) 10,437 526 4,452 (699) 14,716 (6,504) 8,212 (459) (6,964) 799 (157) (526) (5,695) (5,578) 2,174 (1,851) 28,676 CY12 12,971 (2,205) 10,766 757 5,652 476 17,650 (5,146) 12,504 (166) (5,313) 0 (132) (757) (6,448) (7,337) 5,001 (4,996) 38,271 CY13E 11,757 (3,994) 7,762 49 5,326 678 13,815 (5,000) 8,815 0 (5,000) 0 (50) (49) (3,423) (3,522) 5,293 (3,994) 47,475 CY14E 16,246 (4,919) 11,327 49 5,456 (966) 15,866 (10,000) 5,866 0 (10,000) 0 (50) (49) (4,730) (4,829) 1,037 (4,919) 53,432 As at December PROFITABILITY (%) EBITDA Margin APAT Margin RoE RoIC RoCE EFFICIENCY Tax Rate (%) Asset Turnover (x) Inventory (days) Debtors (days) Payables (days) Cash Conversion Cycle (days) Debt/EBITDA (x) Net D/E Interest Coverage PER SHARE DATA EPS (Rs/sh) CEPS (Rs/sh) DPS (Rs/sh) BV (Rs/sh) VALUATION P/E P/BV EV/EBITDA OCF/EV (%) FCF/EV (%) Dividend Yield (%)
Source: Company, HDFC sec Inst Research

CY11 23.5 14.7 15.4 17.6 14.5 31.8 1.1 39 8 53 (5) 0.0 0.0 36.6 7.7 10.9 3.2 52.7 20.1 3.0 12.4 5.1% 2.8% 2.1

CY12 26.0 16.3 18.7 24.6 18.2 31.8 1.2 36 9 36 9 0.0 0.0 32.0 10.2 12.1 3.6 57.4 19.6 3.5 9.5 5.9% 4.2% 1.8

CY13E 19.2 11.7 12.7 18.1 12.7 30.0 1.2 36 8 35 8 0.0 0.0 368.2 7.6 11.1 1.9 62.8 22.2 2.7 12.1 4.5% 2.9% 1.1

CY14E 21.2 13.8 15.9 24.7 15.9 30.0 1.3 36 8 35 8 0.0 329.8 10.5 14.1 2.6 70.3 16.1 2.4 9.0 5.0% 1.9% 1.5

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AMBUJA CEMENTS : RESULTS REVIEW 2QCY13

Rating Definitions BUY NEUTRAL SELL : : : Where the stock is expected to deliver more than 10% returns over the next 12 month period Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

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