Ambuja’s fiscal 2015 first quarter standalone net sales came at INR 27.2 billion, up 14.5% over prior year and 4% ahead of our estimates. This was driven by a strong 6.4% growth in blended realisations and 7.6% growth in volume over the prior year, respectively. Strong price growth is in-line with our thesis that Ambuja holds pricing power in its key markets. Ambuja continued to face depressed demand owing to subdued economic activity. This was reflected in fall in the adjusted EBITDA margins to 21.6%, down 0.4% over prior year. However, in our view, the lower than expected decline in margins is also supported by cost rationalization efforts by the company, which have started to show benefits.
Second quarter results affirm our forecasts and we do not see any material change to our fair value of INR 262 per share and narrow moat rating. Ambuja remains undervalued at current levels of INR 218. Our long term view of the business incorporates synergies from the coming together of Lafarge, ACC and Ambuja businesses. Ambuja’s narrow economic moat is underpinned by its strong pricing power in key markets. The industry-level entry barriers that benefit Ambuja stem from the proximity to raw-material sources that manufacturing plants require, capital intensity, and cement’s ponderous value-to-weight ratio. High fair value uncertainty reflects exposure to construction and housing which are cyclical and linked to economic activity.
All India average cement prices have moved by about 9% in June to INR 322 per bag from INR 297 per bag. This increase will help Ambuja to pass on the cost to the consumers and will improve the profitability for the rest of the year. We expect prices to soften a bit as we approach the seasonally weak third quarter. Our five year forecast includes compounded 10% capacity addition and we believe the company will pursue both organic and inorganic expansions to achieve this growth. Long term demand for building materials remains attractive as government pursues its high spending on infrastructure and housing.
