Ambuja Cement's (ACEM) operational results for the quarter were broadly inline with our estimates with a PBT of Rs2.6bn. However, a tax write back of Rs371mn as well as a lower tax rate for the year helped the company post a profit of Rs2.6bn well ahead of our estimate of Rs1.7bn. A 15% sequential growth in cement volumes countered a drop in realisations and aided a 25bps expansion in margins to 19.3%.

Volumes pickup but realisations stagnant: Post monsoon, there was an uptick in the volumes with a 15% QoQ growth to 5mn mt. However, with the excess capacity overhang in the industry, realisations failed to pickup. Realisations were lower 1% QoQ and 4.2% YoY at Rs3,580/mt. Revenues were marginally higher by 2.2% YoY at Rs18.3bn.

Margin expansion despite clinker purchase: The double whammy of low cement volumes as well as lower realisations had taken margins to an all time low of 19.1% in Q2CY10. Although volumes picked up during the current quarter, the company had to purchase clinker for its grinding units due to the transport strike at its plants in Himachal Pradesh. These plants supply clinker to its grinding units in North and were effectively shut down for 40 days during the quarter. Inspite of the clinker purchase, margins expanded 25bps QoQ to 19.3%. Lower employee costs also aided margin expansion. EBITDA/mt was stable sequentially at ~Rs700.

Lower tax expense: Tax write-back of f Rs371mn and lower effective tax rate for the year boosted the profit for the quarter. Reported profit was higher by 7% YoY at Rs2.6bn.

Outlook: We have reduced our growth estimate for CY11 from 12% to 9%. We expect the company to achieve a volume of 21.8mn mt in FY12. With the cement realisations expected to remain under pressure, we have reduced our margin estimate for CY11 by 410bps to 26.9%. Consequently our earnings estimate for CY11 is lower by 26% to Rs9.

VALUATIONS AND RECOMMENDATION

The stock is currently trading at 7.6x CY11E EV/EBITDA and EV/mt of USD134. We maintain a `HOLD' recommendation on the stock with a revised price target of Rs130, discounting CY11E EBITDA 8x.