Our fair value of Rs 300 per share or narrow moat rating on Ambuja Cement remain intact, following the company’s in-line fiscal 2015 second-quarter results. Our forecast of a weak 2015 for Ambuja is playing out well as company reported a 45% drop in earnings per share to Rs 1.5 per share and an 8% drop in net sales to Rs 25.1 billion respectively versus last year. The sharp drop was owing to a 9% fall in the price realization, partially offset by 1.6% growth in volumes.
The weakness in price realization is largely as a result of seasonality and a drop in demand from construction and real estate in North India. While we saw stronger prices and volumes in West India, North India, another key market for Ambuja saw a drop in prices between 5% and 15% reflecting unseasonal rains and weak demand from rural construction.
Despite the near-term slowdown, the long-term drivers of the business, such as housing, construction and roads, remain strong on the back of high planned spending by the government. Our forecast for fiscal 2015 earnings per share stands at Rs 7.6 per share and we expect cuts in slightly more bullish consensus estimates towards our estimates, following the results and weak market conditions.
We continue to believe that Ambuja, along with Ultratech, will play their role of consolidators during our forecast period given its strong balance sheet as weaker players struggle in a well-supplied industry during the next two years.
At the current price, Ambuja shares are undervalued, in our view, as the consolidation benefits are not being priced into the stock. Our fair value estimate is based on a five-year discounted flow estimate which takes into account the merger of Ambuja, ACC and Lafarge businesses.
This would imply upscaling of other brands towards the higher-priced Ambuja brand and cost synergies owing to costs spread across a much larger revenue base and much larger and diversified geographic market coverage.
