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Gujarat Ambuja: As always, the leader! - Views on News from Equitymaster
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Gujarat Ambuja: As always, the leader!
Apr 18, 2006

Performance Summary
If the performance of Gujarat Ambuja in the third quarter is any indication, the cement sector is going to be in the limelight for some time to come. Led by a sharp increase in cement prices, the company's operating margins have expanded by 6.6% in 3QFY06 (June ending fiscal). Excluding the effect of one-time profit from sale of its holdings in companies and exchange fluctuations, net profit have grown by 77% YoY in the quarter, on a consolidated basis.

Consolidated financials…
(Rs m) 3QFY05 3QFY06 Change 9mFY05 9mFY06 Change
Net Sales 8,987 9,458 5.2% 23,401 24,207 3.4%
Expenditure 6,518 6,235 -4.3% 17,466 17,211 -1.5%
Operating Profit (EBDITA) 2,469 3,223 30.5% 5,935 6,997 17.9%
EBITDA margin (%) 27.5% 34.1%   25.4% 28.9%  
Other income 153 111 -27.7% 487 246 -49.5%
Interest 217 106 -51.4% 672 527 -21.6%
Depreciation 576 511 -11.2% 1,780 1,514 -14.9%
Profit before tax 1,830 2,717 48.5% 3,970 5,201 31.0%
Extraordinary income/(expenses) (38) 328 - 275 134 -51.4%
Tax 173 153 -11.8% 612 782 27.7%
Share of Profits of Associates 3 266 - 4 902 -
Profit after Tax/(Loss) before minority interest 1,622 3,158 94.8% 3,637 5,456 50.0%
Minority interest 66 1 - 168 4 -
Profit after Tax/(Loss) after minority interest 1,556 3,157 102.9% 3,469 5,452 57.2%
Net profit margin (%) 17.3% 33.4%   14.8% 22.5%  
No. of Shares (m) 179 1,355   179 1,355  
Diluted earnings per share*         5.3  
Price to earnings ratio (x)         22.1  
(* trailing 12-months)            

What is the company's business?
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 is amongst the lowest cost producers of cement in the country. Besides, 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), acquired a 14.8% stake from the promoters of the company at Rs 105 per share in the last quarter. The acquisition price includes Rs 15 per share as non-compete fee.

What influenced the performance in 9mFY06?
Pricing power returns: Though cement demand has been growing at 8% per annum over the last decade, cement prices have been volatile in this period in light of supply outstripping demand consistently (while the northern markets witnessed remunerative prices in the mid-1990s, select southern markets witnessed robust realisations towards the later half of 1990s). Now, with demand growing at a faster clip (despatches of Gujarat Ambuja higher by 14% YoY in 3QFY06), prices have risen much faster than anticipated. Considering the 39% YoY growth in standalone net sales in 3QFY06, average prices were higher by 24% YoY during the quarter. Considering the nine months performance, there is a need to upgrade our earnings estimate for FY06 and beyond, reflecting the increase in prices.

Benefits from operating leverage: Cement is a high fixed-cost sector i.e., fixed cost to total cost is broadly around 65%, depending upon the efficiency of each company. Since almost 65% of the costs are fixed, whenever there is a sharp spurt in cement pries, incremental revenues directly flows to the operating level. This has exactly been the case with Gujarat Ambuja in 3QFY06 and 9mFY06. Since the company is one of the most efficient cement players in the country, operating margins at around 34% in 3QFY06 are certainly commendable (since our cement prices estimates were lower than actual, our operating margin estimates were also lower). In our view, we expect margins to remain robust in the next year or so (depending upon the flow of new capacity). If one considers the cost structure, while staff cost, raw material expenses and freight costs have risen as a percentage of sales in 3QFY06, there has been a reduction in cost on the other expenditure front.

Cost break-up…
(% of net sales) 3QFY05 3QFY06 9mFY05 9mFY06
Inc/Dec in stock in trade 6.1% -0.3% 1.6% -0.4%
Raw material consumed 5.0% 6.7% 4.8% 5.8%
Staff costs 3.8% 4.3% 4.1% 4.3%
Power & Fuel 21.3% 20.1% 24.6% 22.7%
Freight & Forwarding 17.9% 18.7% 18.6% 18.8%
Other expenditure 18.6% 16.4% 21.0% 19.9%

One-time gains and higher associates profit-share propel bottomline: Though net profit, on a consolidated basis, has risen by 103% YoY in 3QFY06, excluding the one-time profit from sale of stake in subsidiaries/associates and exchange gain effects in both the quarters, net profit growth stands at 77% YoY (key stake sale include non-cement investments in hotels, finance and housing sectors).

Over the last four quarters: The graph here highlights the superior operating margins of Gujarat Ambuja as compared to its peers (since UltraTech Cement is yet to declare its March 2006, we have not updated the graph). Though ACC reported improved operating margins (around 24%) in the last quarter, it is still way below the efficiency standards of Gujarat Ambuja. We remain confident of the fact that the company will be able to outperform the industry on a sustainable basis in the long-term (as it has in the last decade).

What to expect?
The stock currently trades at Rs 117, implying a price to earnings multiple of 22 times trailing twelve months earnings. Even as we are confident of the company's long-term growth prospects, we remain concerned about the current valuations, which, in our view, are at the higher end of the spectrum. We shall soon update our earning estimates for the company.

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