WOW - GACL - Birla Sun Life

Broking House - Birla Sun Life
Recommendation - Sell
Prices to remain stable at the current levels..
In its Report Dated 5th February 2007, Birla Sun Life (BRICS) downgrades Gujarat Ambuja Cements Ltd (GACL) to Sell with a Target of Rs 155 from CMP of Rs 143.

Birla Sun Life (BRICS) states Gujarat Ambuja Cements Ltd (GACL) reported its first quarter results on consolidated basis with Ambuja Cements Eastern Ltd (ACEL). The quarter''s result is better than BRICS estimates, which was based on standalone financials. However, adjusted for ACEL''s volume, GACL''s Q4CY06 earnings are Rs 16 cr below BRICS''s consolidated estimates. Core EBITDA, at Rs 470 cr, is much lower than BRICS consolidated estimates of Rs 546 cr. The negative surprise in PAT is lower, primarily because the tax rate, at 26%, is lower than BRICS''s assumption of 33.6%.

BRICS mentions that the cement prices are not likely to fall much from current level in the next two years but then, the upside is also capped by the recent cut in import duty on cement. Hence, BRICS has not taken any significant rise in realisation the years ahead. BRICS maintains realisation assumption at Rs 163/bag for CY07 and CY08. After consolidation with ACEL, BRICS projecting consolidated P&L for CY07 and CY08. In view of cost pressures, BRICS is cutting consolidated EPS estimate (with ACC) for CY07 from Rs 12 to Rs 11.2, and for CY08 from Rs 12.7 to Rs 11.9.

BRICS highlights that Cement prices have gone up by 5% in past nine months but GACL''s core EBIDTA/tonne has remained more or less stable at Rs 1160-1170. This trend is more or less same for other cement companies as well indicating that cost pressures are being passed on by manufacturers.

BRICS mentions that the recent cut in import duty on cement is an indication of the Government''s intend to curb a runway rise in prices. If cement prices still continue to increase, the Government might even ban exports. As BRICS pointed out earlier, almost all cement companies EBIDTA/tonne has either remained constant or declined in the last three quarters. Mean while, costs have risen along with prices. This means that cement companies have been able to pass on their additional costs to consumers, and BRICS expect the same situation to continue to in years to come.

Finally, BRICS makes us aware that DCF based on mid cycle prices give March 2008 fair value of Rs 161(13.5x CY08E EPS). Taking CY08 being the peak cycle year, it seems highly unlikely that GACL can trade an EV/EBIDTA of more than 13x on CY08 consolidated estimates. Accordingly, BRICS recommended to Sell with a March 2008 target price of Rs 155.

Thanks HK