2Q CY07 dragged by higher costs & flat volumes

Ambuja’s recurring profit in 2Q CY07 stood at Rs4.2bn, up 27% YoY & 8% QoQ. Net profit was in line with our expectations due to higher-than-expected other income but operating performance disappointed due to higher costs. In 2Q CY07, EBITDA/ton fell 2% QoQ as cost increases (+3% QoQ) outpaced cement prices (+1% QoQ). Overheads & freight were key cost-push factors. 2Q EBITDA grew 8% YoY & was flat QoQ – the slowest growth in ML’s cement universe so far.

Earnings estimates tweaked on higher other income

In 2Q, other income was up 90% QoQ & Ambuja posted net interest income, reflecting strong cash balances & forex gains. This is the primary driver of our 5- 9% earnings upgrade for CY07-08E; EBITDA estimates are largely unchanged.

Volume growth & project execution are focus areas

Our conversations with investors point to two key areas of concern re Ambuja: 1) slower-than-industry volume growth; in 2Q, Ambuja’s volumes were flat YoY & QoQ vs 8% growth for the industry; 2) potential slippages in project execution esp. with regard to capacity expansion at Bhatapara & Rauri; this may increase Ambuja’s earnings vulnerability to any downturn in cement prices over next 2 yrs. Meanwhile, along with 2Q results, Ambuja announced commissioning of a 30MW captive thermal power unit in Gujarat & a 1mn tpa grinding unit in West Bengal.

We see limited upside; Maintain Neutral

Ambuja’s stock price has underperformed most other cement majors in recent months. The stock is trading at an EV/EBITDA of ~9x CY07E & ~11x CY08E versus its mid-cycle valuation at ~10x EV/E during the previous cyclical upturn. We see limited short-term upside potential & maintain our Neutral rating.