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Gujarat Ambuja: A strong performance

Jan 27, 2005

Performance summary
Gujarat Ambuja, the lowest cost manufacturer of cement in the world, announced its 2QFY05 results last week. The company posted robust topline growth of nearly 43% YoY while the bottomline improved by an impressive 50% on the back of a strong volumes growth of 31% YoY.

What is the company's business?
Gujarat Ambuja, with a total production capacity of 12.5 MT (million tonnes), is the country's third largest producer of cement. The company accounts for nearly 9% of the total domestic production capacity and has a strong presence in the north and western markets. The company is also the country's largest cement exporter. Further, the company has picked up a 14.4% stake in its peer, ACC, which is the second largest cement manufacturer in the country.

(Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
Net sales 5,145 7,353 42.9% 9,764 14,425 47.7%
Expenditure 3,935 5,781 46.9% 7,809 10,960 40.3%
Operating profit (EBDITA) 1,210 1,572 29.9% 1,955 3,466 77.2%
EBDITA margin (%) 23.5% 21.4% 20.0% 24.0%
Other income 109 414 278.8% 307 648 111.1%
Interest 262 226 -13.8% 486 455 -6.3%
Depreciation 506 598 18.1% 1,002 1,205 20.2%
Profit before tax 551 1,162 111.0% 775 2,454 216.8%
Extraordinary items 341 (33) 387 (112)
Tax 280 212 -24.2% 376 416 10.7%
Profit after tax/(loss) 611 916 50.0% 786 1,926 145.1%
Net profit margin (%) 11.9% 12.5% 8.0% 13.4%
No. of shares (m) 158.3 179.6 158.3 179.6
Diluted earnings per share (Rs)* 15.4 20.4 6.6 14.3
Price to earnings ratio (x) 18.5
(* annualised)

What has driven performance in 2QFY05?
Strong volume growth: During 2QFY05, the company witnessed topline growth of an impressive 43% YoY. This could largely be attributed to the high demand of cement for construction and infrastructure activities driving volumes up by 31% during the quarter. To put things in perspective, cement demand during the 2QFY05 has witnessed a double-digit growth of 12% on the back of increasing demand from the housing and infrastructure sector. Also, the narrowing gap between demand and supply in the absence of no significant capacity expansion ensured a price hike of nearly 9% during the said period.

Expenditure Table
(%) of sales 2QFY04 2QFY05 1HFY04 1HFY05
Consumption of raw materials 0.03% 5.4% 2.2% 3.5%
Staff cost 4.4% 4.0% 5.2% 4.1%
Power & fuel 26.9% 27.4% 25.9% 26.6%
Freight & forwarding 20.9% 19.5% 21.0% 19.1%
Other expenditure 24.2% 22.3% 25.7% 22.8%

Power costs play spoilsport: During the period under review, operating margins have declined by 210 basis points on the back of high power and fuel costs (accounting for 35% of total expenditure). Also, the company witnessed inventory losses during the period, further creating a dent in operating margins. But for better control over freight and other expenditure, operating margins could have been much lower.

Other income boosts bottomline: The bottomline YoY growth of 52% during 2QFY05 is largely a result of higher other income component, which has grown by nearly 279% YoY during the period. The other income fillip is largely due to the gains made by the company on account of foreign exchange differentials. Also helping boost the bottomline was lower interest outgo, which reduced by nearly 14% during the quarter. For 1HFY05 also, the bottomline growth of over 145% is aided by the other income growth of over 111%. Also, the bottomline growth during the 1HFY05 could be attributed to the trickle down effect of the strong business performance.

What to expect?
At Rs 420, the stock is currently trading a price to earnings multiple of 18.5 times 1HFY05 annualised earnings. Though valuations seem to be on the higher side, the company commands a premium owing to presence in regions like west and north. Besides, better export prospects would also propel value growth in the next two years. As far as the impact on Holcim deal on the company is concerned, the net holding in ACC has actually increased without any additional investments. The company has the option to sell this stake in ACC in the future. It has the option to either hold this stake on a strategic basis or sell it to Holcim to pursue its organic expansion plans. Overall, given the pricing situation in mind, Gujarat Ambuja will remain our top play in the sector from a two to three year perspective.

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