JP Morgan remain Underweight on India's Ambuja Cements. Key risks to the price target as per JP Morgan is a sharp recovery in cement demand to help drive higher than expected volume growth (and therefore utilisation levels) and reduction in coal costs leading to decline in operating cost per tonne.
"Demand has not been particularly strong in the last two months, but cement prices have moved up across most markets in June and July. Lack of rains in the monsoon is positive for cement demand in the near term given the extended construction season, and for Ambuja Cement, it should mean a smaller quarter on quarter drop in the seasonally weak September quarter. A weak monsoon is not positive for cement demand from a 12 month perspective, given the likely negative impact on rural housing construction," the report said.
Ambuja Cement reported earnings in line with estimates. Lesser rains in monsoons, should lead to lower cement price correction driven by an extended construction season. "We increase our CY13E EPS estimates by 13 per cent driven by higher ASP" said JP Morgan note.
Ambuja Cements, which is 50.3 per cent owned by Holcim, reported a net profit rise of 35 per cent to INR4.69bn for the April-June 2012 quarter while sales were up 18 per cent. Ambuja said that it expects higher input costs and freight rates to put pressure on future margins.
