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Gujarat Ambuja: It’s a question of valuations! - Views on News from Equitymaster
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Gujarat Ambuja: It’s a question of valuations!
Jan 30, 2006

Performance Summary
Gujarat Ambuja, India’s leading cement player, reported its 2QFY06 results today. The numbers are decent with the company registering a 32.5% YoY growth in consolidated net profits for the quarter on the back of an 8.5% YoY rise in consolidated topline. Strong growth in bottomline could be attributed largely to a sharp improvement in operating margins. However, non-operating financial expenses have also played their part in aiding the bottomline growth.

Consolidated* performance snapshot…
(Rs m) 2QFY05 2QFY06 Change 1HFY05 1HFY06 Change
Net Sales 7,353 7,976 8.5% 14,420 14,750 2.3%
Expenditure 5,781 5,916 2.3% 10,955 10,976 0.2%
Operating Profit (EBDITA) 1,572 2,060 31.0% 3,466 3,774 8.9%
EBITDA margin (%) 21.4% 25.8%   24.0% 25.6%  
Other income 414 (67)   648 (59)  
Interest 226 201 -10.9% 455 422 -7.4%
Depreciation 598 508 -15.1% 1,205 1,003 -16.7%
Profit before tax 1,162 1,284 10.5% 2,454 2,291 -6.7%
Share of Profits of Associates - -   - 340  
Tax 212 69 -67.5% 416 334 -19.6%
Profit after Tax/(Loss) before minority interest 950 1,215 27.9% 2,038 2,296 12.6%
Minority interest 33 -   112 1  
Profit after Tax/(Loss) after minority interest 916 1,215 32.5% 1,926 2,295 19.1%
Net profit margin (%) 12.5% 15.2%   13.4% 15.6%  
No. of Shares (m) 179 1,352   179 1,352  
Diluted earnings per share*         4.2  
Price to earnings ratio (x)         21.9  
(* trailing 12-months)            

* 2QFY06 and 1HFY06 consolidated numbers are not strictly comparable to the corresponding quarter in the previous year owing to the fact that the results for the current quarter do not include results of Ambuja Cement India Ltd (ACIL) and its subsidiaries Ambuja Cement Eastern Ltd and Kakinada Cements Ltd., which have ceased to be subsidiaries of the Company. ACIL has since become an Associate of the company and the share of profit of Associate has been recognised.

India’s most cost-efficient cement producer
Gujarat Ambuja, with a total consolidated capacity of 13.9 million tonnes (MT), is the third largest cement producer in the country. It has close to 9% of the country's total cement capacity and has the western and the northern region as its principal markets. With plants that are believed to be highly efficient, Gujarat Ambuja has come to be known as amongst the lowest cost producer of cement in the country. Besides, the company is also the largest exporter of cement and this helps it enhance capacity utilisation.

The company has announced today that Holderind Investments Ltd. (Holcim Mauritius), an indirect wholly owned subsidiary of Holcim Ltd., has acquired a 14.8% stake from the promoters of the company at Rs 105 per share, which includes Rs 15 per share as non-compete fee.

What has driven performance in 2QFY06?
Respectable topline growth: Gujarat Ambuja reported a 9% YoY growth in topline for the December quarter. While volume sales were only marginally higher by 2% YoY, firm cement realisations in the domestic as well as the export markets aided the topline growth. It must be noted that the company exports nearly 15% of its production, which in turn forms about 50% of India’s total cement exports.

Cost break-up (% of net sales)
  2QFY05 2QFY06 1HFY05 1HFY06
Inc/Dec in stock in trade 0.4% -1.3% -1.1% -0.5%
Raw material consumed 5.0% 5.3% 4.6% 5.2%
Staff costs 4.2% 4.2% 4.3% 4.3%
Power & Fuel 27.5% 23.2% 26.6% 24.3%
Freight & Forwarding 19.5% 19.3% 19.1% 18.9%
Other expenditure 22.0% 23.4% 22.5% 22.2%
Total expenses 78.6% 74.2% 76.0% 74.4%

Operating margins expand: Operating margins were higher by almost 440 basis points during the December quarter. The biggest contributor to the improvement in margins was power and fuel expense, which was lower by almost 430 basis points as percentage of net sales. Even the freight charges were under control despite the rise in petro product prices during the quarter, which is commendable. However, higher other expenditure, which was on account of a provision made for the disputed demand of excise duty on clinker consumed for manufacture of cement exempt from excise duty, capped margin expansion.

Net profits outpace topline growth: The YoY bottomline growth of over 34% outpaced the topline growth by a significant margin. While part of this could be attributed to the improvement in operational performance, lower interest and depreciation charges helped the net profit growth. It must be noted that the profit growth would have had been much higher but for the absence of contribution from other income and higher tax outgo (28% of PBT in 2QFY06 as compared to 20% in 2QFY05).

What to expect?
At Rs 90, the stock is trading at a price to earnings multiple of 21.4 times its trailing 12-month earnings. Further, at the current price, the stock is trading at an EV/ton of about US$ 135 our FY08 estimates. The company commands a premium in terms of valuations as compared to its peers owing to presence in lucrative regions like West and the North and also due to its operating efficiencies. Nonetheless, we believe that the current valuations of the stock are rather expensive.

With cement demand in the country slated to grow at about 8%-10% over the next couple of years and absence of any significant cement capacity coming on stream, we expect the cement demand-supply situation in the country to continue to improve, which augurs well for cement prices. Also, considering that Gujarat Ambuja has an export presence where realisations have remained firm, the company could remain insulated to a certain extent from any volatility in domestic cement prices.

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