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Ambuja Cem: Higher realizations drive topline - Views on News from Equitymaster

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Ambuja Cem: Higher realizations drive topline
Feb 23, 2015

Ambuja Cements has announced its results for the fourth quarter of the calendar year 2014. During the quarter, the company's sales and net profit increased by 8.7% YoY and 3.8% YoY respectively. Here is our analysis of the results:

Performance summary
  • On a standalone basis, net sales increased by 8.7% during the quarter driven by better cement realisations.
  • Operating profits increased by 15% YoY; operating margins expanded from 13.2% in 4QCY13 to 14% in 4QCY14.
  • Net profit increased by 3.8% YoY; net profit margin contracted from 14.5% in 4QCY13 to 13.8% in 4QCY14.
  • During the calendar year ended December 2014, sales and profit increased by 9.2% YoY and 15.6% YoY respectively.

(Rs m) 4QCY13 4QCY14 Change CY13 CY14 Change
Net sales 21,893 23,790 8.7% 90,787 99,107 9.2%
Expenditure 19,002 20,466 7.7% 75,073 80,497 7.2%
Operating profit (EBITDA) 2,891 3,324 15.0% 15,714 18,610 18.4%
EBITDA margin 13.2% 14.0%   17.3% 18.8%  
Other income 1062 983 -7.5% 4730 4,964 4.9%
Depreciation 1,228 1,355 10.4% 4,901 5,095 4.0%
Interest 169 103 -39.3% 651 645 -0.9%
Profit before tax & exceptional items 2,556 2,848 11.5% 14,893 17,834 19.7%
Exceptional gain/ (loss) - -   248 -  
Profit before tax 2,556 2,848 11.5% 15,141 17,834 17.8%
Tax (610) (438) NA 2,196 2,871 30.7%
Effective tax rate NA NA   14.5% 16.1%  
Profit after tax 3,165 3,286 3.8% 12,946 14,964 15.6%
PAT margin 14.5% 13.8%   14.3% 15.1%  
No of shares (m)       1,545.9 1,549.8  
Diluted EPS (Rs)*         9.7  
P/E (times)         27.4  
*trailing twelve month earnings

What has driven performance in 4QCY14?
  • On a standalone basis, Ambuja Cements' net sales increased by 8.7% YoY during the quarter ended December 2014. Cement sales volumes growth was muted at 1.6% YoY. The growth in the topline was driven by improvement in cement realisations.

  • On the cost front, raw material costs, employee expenses and power & fuel expenses increased by 0.8% YoY, 1. 7% YoY and 0.4% YoY respectively (as a percentage of net sales). However, freight & forwarding expenses and other expenses declined by 1.9% YoY and 1.6% YoY (as a percentage of net sales). As a result, operating profit margins expanded from 13.2% in 4QCY13 to 14% in 4QCY14.

    Operating cost break-up
    (Rs m) 4QCY13 4QCY14 Change
    Raw materials consumed 1,730 1,889  
    Purchase of stock-in-trade 7 148  
    Change in inventory 533 616  
    Total raw materials cost 2,270 2,652 16.9%
    % of Net sales 10.4% 11.1%  
    Employee expenses 1,196 1,694 41.7%
    % of Net sales 5.5% 7.1%  
    Power & fuel expenses 5,007 5,529 10.4%
    % of Net sales 22.9% 23.2%  
    Freight & forwarding expenses 5,589 5,612 0.4%
    % of Net sales 25.5% 23.6%  
    Other expenses 4,941 4,978 0.8%
    % of Net sales 22.6% 20.9%  
    Total operating expenditure 19,002 20,466 7.7%
    % of Net sales 86.8% 86.0%  

    The company reported tax credit worth Rs 437.5 million during 4QFY14 as against tax credit worth Rs 609.5 million in 4QCY13.

    At the bottomline level, net profit rose almost in line with the growth in operating profit. Net profit margins expanded from 8.3% in 4QCY13 to 10.9% in 4QCY14.

What to expect?
During the full calendar year ended December 2014, Ambuja Cements' cement and clinker sales volume stood at 22.15 million tonnes, indicating a meagre growth of 2.5% YoY. As such, the increase in the topline has been driven mainly by improved cement realizations.

The company's board of directors has recommended a final dividend of Rs 3.2 per share. Along with the interim dividend of Rs 1.8 per share, the total dividend for the year amounts to Rs 5 per share. At the current share price level, this represents of dividend yield of about 1.9%.

With improving macroeconomic factors, changing business sentiment and expectation of higher GDP growth, cement demand is expected to pick up in the medium to long term. Moreover, the government's focus on housing and infrastructure development should augur well for the cement sector in the coming times. As such, the long term prospects of the cement sector seem positive.

At the current price level, the stock is trading at 27.4 times its trailing twelve month standalone earnings. In our StockSelect recommendation report dated 30 October 2014, we had recommended a BUY on Ambuja Cements with a target price of Rs 288 from a 2-3 year perspective. Given the run up in the stock price post our recommendation, we now recommend a HOLD view on the stock.

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