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Ambuja Cem: Sluggish demand spoils show - Views on News from Equitymaster

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Ambuja Cem: Sluggish demand spoils show
Feb 14, 2013

Ambuja Cements has announced its results for the fourth quarter of the calendar year 2012 (4QCY12). During the quarter, the company's sales and net profits reported a decline of 1% YoY and 30% YoY respectively. Here is our analysis of the results:

Performance summary
  • On a standalone basis, net sales remain almost flat during the quarter on account of sluggish cement demand.
  • Operating profits remain sustained at 18.5% during 4QCY12.
  • While other income increases by 31.2% YoY, depreciation charges and interest costs also surge by 49.9%% YoY and 146.1% YoY respectively.
  • Lacklustre sales and weak non-operating performance causes the bottomline to drop by 29.9% YoY. Net margins decline from 13% in 4QCY11 to 9.2% in 4QCY12.

Financial performance snapshot
  Standalone Consolidated
(Rs m) 4QCY11 4QCY12 Change CY11 CY12 Change CY11 CY12 Change
Net sales 23,293 23,133 -0.7% 85,043 96,749 13.8% 85,210 97,395 14.3%
Expenditure 18,984 18,851 -0.7% 65,772 72,573 10.3% 65,936 73,216 11.0%
Operating profit (EBITDA) 4,309 4,282 -0.6% 19,271 24,176 25.5% 19,274 24,179 25.5%
EBITDA margin 18.5% 18.5%   22.7% 25.0%   22.6% 24.8%  
Other income 838 1,100 31.2% 2978 4042 35.7% 2977 4040 35.7%
Depreciation 1,238 1,855 49.9% 4,452 5,652 27.0% 4,462 5,687 27.4%
Interest 99 243 146.1% 526 757 43.8% 534 785 46.8%
Profit before tax & exceptional items 3,811 3,284 -13.8% 17,271 21,810 26.3% 17,255 21,748 26.0%
Exceptional gain/ (loss) (243) -   (243) (2,791)   (243) (2,791)  
Tax 544 1,164 113.9% 4,740 6,048 27.6% 4,738 6,039 27.5%
Minority Interest NA NA   NA NA   (3) (14) 456.0%
Net profit 3,024 2,120 -29.9% 12,289 12,971 5.5% 12,277 12,932 5.3%
Net profit margin 13.0% 9.2%   14.4% 13.4%   14.4% 13.3%  
No of shares (m)       1534.4 1542.2   1534.4 1542.2  
Diluted EPS (Rs)*         8.4     8.4  
P/E (times)         22.5     22.6  
*trailing twelve month earnings

What has driven performance in 4QCY12?
  • On a standalone basis, Ambuja Cements' net sales declined marginally by 0.7% YoY during the quarter ended December 2012. For the full calendar year 2012, the company reported sales volumes of 21.43 m tonnes, higher by 2.5% YoY.

  • On the cost front, most major cost heads, barring raw materials, witnessed some pressure. While cost of raw materials declined by 8.2% YoY (as a percentage of net sales), power & fuel expenses, freight & forwarding expenses and other expenses increased by 3.7% YoY, 3.3% YoY and 0.7% YoY respectively (as a percentage of net sales). As a result, operating profit margins remained unchanged at 18.5% in 4QCY12.

    Operating cost break-up
    (Rs m) 4QCY11 4QCY12 Change
    Raw materials consumed 1,525 1,625  
    Change in inventory 1,832 (193)  
    Total raw materials cost 3,357 1,433 -57.3%
    % of net sales 14.4% 6.2%  
    Employee expenses 1,255 1,367 8.9%
    % of net sales 5.4% 5.9%  
    Power & fuel expenses 4,654 5,473 17.6%
    % of net sales 20.0% 23.7%  
    Freight & forwarding expenses 5,082 5,816 14.4%
    % of net sales 21.8% 25.1%  
    Other expenses 4,637 4,764 2.7%
    % of net sales 19.9% 20.6%  
    Total operating expenditure 18,984 18,851 -0.7%
    % of net sales 81.5% 81.5%  

  • Other income rose by 31.2% YoY during the quarter. On the other hand, interest costs and depreciation charges were also higher by 146.1% YoY and 49.9% YoY respectively during the period. During 1QCY12, Ambuja Cements had retrospectively changed its depreciation method on fixed assets pertaining to Captive Power Plants from the 'Straight Line' method to 'Written Down Value' method. As per the company, this change gives a more suitable presentation and gives a systematic basis of depreciation charge. As a result, there was an additional depreciation charge of Rs 108.6 m during the current quarter and Rs 3,201.4 m for the full year ended December 2012. If not for the change in depreciation method, the net profit would have been higher by Rs. 73.4 m and Rs 2,162.7 m for the quarter and full year ended December 2012 respectively.

  • At the bottomline level, net profits declined by 29.9% YoY on account of sluggish sales, higher interest expenses and change in depreciation method for captive power plants. Net margins contracted from 13% in 4QCY11 to 9.2% in 4QCY12.

  • Post the commissioning of one pre-grinder with a capacity of 0.6 mt at its unit at Bhatapara in Chhattisgarh, Ambuja's total cement grinding capacity stands at 27.95 m tonnes.

  • The company is working on expansion plans comprising roller press and related logistics enhancements in the Sankrail Grinding Unit in West Bengal. Post completion, the grinding capacity will increase by 0.8 m tonnes.

  • In order to focus on increasing the usage of alternative fuels, the company has chalked out capex plans of Rs 2 bn at its five integrated plants over the next few years.

  • The company is set to expand its presence in the south Indian market with a new Bulk Cement Terminal (BCT) of 1 m tonne capacity at Mangalore which is nearing completion.

  • The company's board of directors has declared a final dividend of Rs 2.2 per share for the calendar year ended 2012. Along with the interim dividend of Rs 1.4 per share, the total dividend for the calendar year stands at Rs 3.6 per share.

What to expect?
Ambuja Cement's performance during the quarter was adversely affected by the slump in cement demand and drop in cement prices. The slowdown over the short term notwithstanding, we expect cement demand to grow at about 8% over the next few years. However, rising costs of raw materials, logistics and energy will continue to put pressure on profit margins.

At the current prices of Rs 189.7, the stock is trading at 22.6 times its trailing twelve month consolidated earnings. Given the high valuations, we maintain our 'Sell' view on the stock from a 2-year perspective.

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