We stay committed to a positive midterm view on Ambuja, despite the 36% year-over-year third-quarter earnings fall to Rs 0.99 per share as its realised cement selling price fell 7% from year-ago levels. This fall could not be fully offset by a 3% rise in sales volume.
We expect the weakness in North Indian cement demand seen in the past two quarters to diminish, and we find the recent uptick in cement prices by 15%-30% to point to better fourth-quarter profits.
We continue to forecast average 15% revenue growth and 17% earnings growth over the 2016-19 period, driven by a 3% annual rise in cement prices and the company’s capacity expansion, along with the Lafarge merger. India’s planned public spending on housing and infrastructure underpin our expectation for a gradual EBITDA margin recovery to a midcycle level of 19% by 2018, up from 16% in 2015.
While we lower our 2015 full-year EPS by 14% to Rs 12.4, our intact midterm view leads to an unchanged fair value estimate of Rs 300 per share. At the current price, Ambuja shares are undervalued. Adjusted for prior quarter provisions, the third-quarter EBITDA margin fell by 1.9% to 16.1% versus the prior year, but this is an improvement from the 15.4% in the seasonally soft second quarter.
We see EBITDA margins picking up from here on, driven by:
1) Cost efficiencies arising from the amalgamation of Ambuja, ACC and Lafarge;
2) positive operating leverage from 11% growth in sales volume over the 2016-19 period;
3) improvement in price realisation by an average of 3% over the same period, resulting from movement towards the higher-priced Ambuja brand; and
4) improvement in product mix, resulting from the amalgamation of higher-margin ready-to-mix concrete business from Lafarge. We retain our narrow moat rating four Ambuja. We continue to envision Ambuja delivering excess returns on invested capital over our forecast period.
