Gujarat Ambuja, the fourth largest cement producer in the country, announced healthy March quarter results. The company has reported nearly 27% jump in topline while its bottomline has risen by 22% in 3QFY03 on a YoY basis. Other income contributed significantly to the bottomline growth. Operating margins have however fallen by nearly 240 basis points. In 9mFY03, topline has shown a 26% growth while bottomline has dipped by 8% on a YoY basis.
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The healthy topline growth during the quarter was mainly due to a 36% increase in the sales volumes of the company. The company has reported a strong growth (61% YoY) in the exports segment during the quarter. Exports now make up nearly 25% of total sales volumes. Topline growth though robust, has been reigned back due to a 6% fall in realisations. The fall in realisations was also marginally higher than the last quarter (5%). This seems to be because of the new cement capacity that has come on line in Gujarat i.e. the 2.6 m tonne Sanghi Cements plant. The over capacity in the industry is however slowly being absorbed. We must point out that though cement sales volumes have been healthy, a poor demand growth scenario in the western region may impact the sales of the company going forward.
The company has managed to improve its operating profits despite higher fuel costs and increased excise duty. The company has indicated that direct cost of production fell by 7% due to high productivity. Operating margins have however fallen by nearly 200 basis points. This points towards the continuing scenario of poor cement realisations.
Interest cost for the March quarter has reduced significantly compared to the same period last year. Depreciation has however been higher due to the commissioning of the Chandrapur plant. A 123% growth in other income has significantly helped improve the profit before taxes. However we must also point out that not accounting for other income, net profit has growth has still been strong at 13% in the March quarter.
At Rs 165, the stock is trading at a P/E multiple of 9x its annualised 9mFY03 earnings. Aggressive cost cutting has helped the company shore up its operating profits thus improving bottomline. Expected improvement in realisations going forward will further add to the bottomline. While a new capacity has been added in the western region, the worst seems to be over as far as realisations are concerned. From here on, the company's margins are likely to be maintained due to stable realisations. The valuations however, still seem to be high for a commodity company and the stock may languish at these levels in the near term. That said, in the long term, the cement industry prospects look good with healthy demand and improving cement prices.
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