Ambuja Cements - Not out of the woods yet

We believe downside risks to Ambuja's earnings persist with 40% exposure to North Indian markets where imports from Pakistan and new capacity will exert pricing pressure. Despite falling, the stock still does not look cheap relative to peers. We cut our EPS forecasts by 5-14%, Sell.

Pricing power reduced in ACEM's key markets
ACEM sells over 66% of its cement in Gujarat and North India, where we see limited pricing power in FY09. In Gujarat, there is government pressure (producers agreed to reduce prices in return for the lifting of a ban on exports from the state), while, in North India, we believe imports of around 0.1mmt/month from Pakistan are reducing pricing power. This was clearly visible in ACEM's 2QFY08 results, which saw a decline of 1% qoq in realisations, while companies like India Cements raised prices by 3% qoq.

Cost pressures could accelerate
ACEM's coal sourcing is as follows: 33% imports, 50% from linkage coal of Coal India and 17% from local spot markets. Management said it would be importing coal at contracted prices of US$140 CIF until the current contracts run out in 3QFY08. Thereafter, its imported coal would cost US$210 CIF, which we see putting further pressure on margins. ACEM's power & fuel costs, at Rs717/mt in 2QFY08, were still lower than those of players like India Cements, at Rs832/mt.

We expect India cement pricing to come under pressure in 2009
We forecast an incremental capacity addition of 75.6mmt in India over the next two years, vs incremental demand growth of 39.8mmt. While most of the new capacity commissioned this year will go into full production only in calendar 2009, we forecast a surplus of 23.6mmt (which represents 9% of the cement industry's capacity) in FY10. We have modelled a 5% drop in realisations in FY09 and, so, expect EBITDA/mt to fall from Rs1,087 in 2008 to Rs866 in 2009.

Sell maintained with lower target price of Rs78
After the weaker-than-expected 2QFY08 results, we have cut our FY08-09F EPS by 5-14%. We have lowered volume estimates due to loss of market share to imports in North India and our margins due to higher coal costs. Despite the stock correction, ACEM at US$124 EV/mt still more expensive than ACC at US$97 and India Cement at US$86.