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Gujarat Ambuja: Quantum jump! - Views on News from Equitymaster

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Gujarat Ambuja: Quantum jump!

Feb 2, 2007

Performance summary
Gujarat Ambuja, a leading cement player in the country, has announced December 2006 quarter results. During the quarter, while topline of the company grew by almost 72% YoY, bottomline has reported a stellar 284% YoY growth on the back of improved realisations and volume growth. Though the costs have been higher by 49% YoY, operating margin has witnessed an expansion of 990 basis points (9.9%), a fallout of an extremely favourable pricing scenario.

It must be noted that Ambuja Cement Eastern Ltd has been merged w.e.f. January 1, 2006 and therefore, the financials are not strictly comparable.

Financial performance snapshot
(Rs m) 4QCY05 4QCY06 Change CY05 CY06 Change
Net sales 7,732 13,291 71.9% 28,159 48,479 72.2%
Expenditure 5,711 8,500 48.8% 20,226 30,871 52.6%
Operating profit (EBITDA) 2,021 4,791 137.1% 7,933 17,608 122.0%
EBITDA margin 26.1% 36.0%   28.2% 36.3%  
Other income (76) 403 N.A. 153 1,199 682.7%
Interest 197 45 -77.2% 847 377 -55.5%
Depreciation 502 572 14.0% 1,950 2,269 16.4%
Profit before tax/(loss) 1,246 4,576 267.4% 5,289 16,160 205.6%
Tax 367 1,199 227.0% 774 2,760 256.5%
Net profit 879 3,378 284.3% 4,515 13,401 196.8%
Net profit margin 11.4% 25.4%   16.0% 27.6%  
No of shares (m) 1,353 1,517   1,353 1,517  
Diluted EPS (Rs)*         8.5  
P/E (times)         16.9  
*trailing twelve month earnings            
Note: Quarterly numbers from BSE have been added up to arrive at CY05 results.

What is the company’s business?
Gujarat Ambuja, with a total consolidated capacity of 16 million tonnes (MT), is the third largest cement producer in the country. It has close to 10% of the country's total cement capacity and has the western and northern regions as its principal markets. The company is also the largest exporter of cement and this helps it enhance capacity utilisation. Holcim Mauritius, an indirect wholly owned subsidiary of Holcim (Europe), over a period of time has acquired 21% stake from the promoters of the company.

What has driven performance in 4QCY06?
All about realisations: Backed by a favourable pricing scenario and robust volume growth, the company has reported topline growth of 72% YoY. The company’s production and despatches during the year were largely in line with the industry. The company continued to report robust numbers mainly on account of higher sales realisations. The strategic location of the company enables it to serve export markets and this further boosts realisations. The company mainly caters to northern and western markets but the merger of Ambuja Cement Eastern with itself has also provided access to eastern markets, the region that is witnessing robust demand growth on account of infrastructure developments taking place within the region.

Costs still a concern: While costs as a percentage of sales have come down, mainly on account of robust realisations, on a cost per tonne basis, they have actually increased. Freight costs in particular have risen at a fair clip, seemingly on account of transporters increasing freight rates on the back of rising liquid fuel prices. Had it not been for these increases, the operating margin expansion of 990 basis points YoY would have been much higher.

Cost break-up (as a % of sales) 4QCY05 4QCY06
Consumption of raw material 5.3% 7.3%
Staff cost 4.1% 3.1%
Power and fuel 23.9% 17.3%
Freight and forwarding 18.1% 19.3%
Other Expenses 22.4% 16.9%
Total Expenses 73.9% 64.0%

Net profits more than triples: The company’s net profits more than tripled during 4QCY06 as compared to corresponding period last year on account of strong operating leverage benefits. Further, with cash registers doing overtime, the company has been able to reduce debt on its books, the benefits of which are accruing by way of reduced interest expenses. A big jump in other income has also led to a substantial growth in net profits. Thus, improved realisations, lower interest outgo and higher other income helped company achieve 1,400 basis points net margin expansion.

What to expect?
At the current price of Rs 143, the stock is trading at a price to earnings multiple of 16.9 times trailing twelve month earnings. While the merger with Ambuja Cement Eastern will provide the company with a presence in the Eastern markets and Holcim’s expertise will benefit it in the long term, we suggest caution with respect to current stretched valuations.

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