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Gujarat Ambuja: Riding the infrastructure boom

Apr 20, 2005

Performance Summary
Gujarat Ambuja, one of the most cost-efficient cement producers in the country, reported its 3QFY05 results (June ending company) yesterday. For the quarter, the company has reported a 3% YoY fall in consolidated earnings despite a 30% YoY growth in topline. However, it must be noted that the YoY numbers are not strictly comparable owing to the merger of its subsidiary - Ambuja Cement Rajasthan - with the company effective June 2004. The company also declared a dividend of Rs 6 per share (60% of face value and dividend yield of about 1.5%). Apart from this, the company has announced a bonus issue in the ratio of 1 share for every 2 shares held and would split its Rs 10 face value into 5 shares of Rs 2 each.

Consolidated snapshot...
(Rs m) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
Net Sales 6,906 8,989 30.2% 16,670 23,414 40.5%
Expenditure 4,694 6,520 38.9% 12,503 17,480 39.8%
Operating Profit (EBDITA) 2,212 2,469 11.6% 4,167 5,935 42.4%
EBITDA margin (%) 32.0% 27.5% 25.0% 25.3%
Other income 357 119 -66.8% 664 767 15.5%
Interest 212 217 2.4% 698 672 -3.6%
Depreciation 485 576 18.8% 1,487 1,780 19.8%
Profit before tax 1,872 1,795 -4.1% 2,647 4,249 60.5%
Extraordinary items - - 444 -  
Tax 205 173 -15.4% 580 612 5.5%
Profit after Tax/(Loss) before minority interest 1,667 1,622 -2.7% 2,511 3,637 44.8%
Minority interest - -   139 168 20.9%
Profit after Tax/(Loss) after minority interest 1,667 1,622 -2.7% 2,372 3,469 46.2%
Net profit margin (%) 24.1% 18.0%   15.1% 15.5%  
No. of Shares (m) 166 180   166 180  
Diluted earnings per share* 40.1 36.1   20.1 27.0  
Price to earnings ratio (x)   11.8     15.8  
(* annualised)            

India's most cost-efficient cement producer
Gujarat Ambuja, with a total consolidated capacity of 13.9 million tonnes (MT), is the third largest producer of cement 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 has come to be known as the lowest cost producer of cement in the country. Besides, the company is also the largest exporter of cement and this helps it enhance capacity utilisation.

What has driven performance in 3QFY05?
Strong topline growth: Gujarat Ambuja has registered a strong topline growth of 30% YoY in the quarter ending March 2005, which happens to be the company's third quarter as it follows the financial year July to June. The company witnessed a significant rise in cement sold in terms of volumes (up 19% YoY). This is commendable in the backdrop of the fact that the month of February 2005 had witnessed a slowdown owing to severe winters in the northern parts of the country that had led to temporary suspension of construction and infrastructure work leading to lower offtake of cement. It must be noted that the company has a strong presence in the northern markets.

As far as the pricing pattern was concerned, both the northern and the western markets had faced some pressure during the quarter. The YoY growth in cement realisations during the quarter was higher by 5% for the company. However, the company has seemingly benefited from its exports to international markets, where realisations have remained strong. It must be noted that the company's exports form nearly 17%-18% of its volume sales, which in turn forms about 50% of India's total cement exports.

Operating margins dip: A commensurate growth in operating profits for the company was partially affected by the rise in power and fuel costs (up 38% YoY) owing to higher coal prices, both, in the domestic as well as the international markets. Thus, the operating margins during the quarter witnessed a fall of 450 basis points. However, on the nine-month basis, the operating margins have held on at about 25%.

Retarded net profits: Apart from the pressure at the operating level, a sharp 67% fall in other income contributed to the 3% fall in bottomline for the quarter, which was owing to adjustments pertaining to the exchange rate. Further, while interest rates grew by a marginal 2%, depreciation charges were higher by 19%.

What to expect?
At Rs 425, the stock is trading a price to earnings multiple of 15.8 times annualised 9mFY05 earnings. Though valuations seem to be on the higher side, the company commands a premium owing to presence in regions like west and north. Apart from the fact that the demand for cement in the country is expected to grow at about 8% to 9% over the next couple of years, a favourable demand-supply situation in the northern and western markets augurs well for the company. Further, with slack demand from the northern parts of the country being an aberration, demand recovery in this region would aid the company's growth prospects. Also, it must be noted that international markets, where realisations have remained firm, contribute 17% to 18% of the company's volume sales. Further, the management has indicated raising prices by 4% to counter the 4% cost push arising owing to the implementation of VAT.

As far as the impact of Holcim deal on the company is concerned, the net holding of Gujarat Ambuja in ACC has actually increased without any additional investments. The company has the option to sell this stake in ACC in the future. It has the option to either hold this stake on a strategic basis or sell it to Holcim to pursue its organic expansion plans. Overall, given the pricing situation in mind, Gujarat Ambuja will remain our top play in the sector from a two to three year perspective. Investors must note that while the company is on track to meet our topline estimates, we may have to upgrade our bottomline numbers marginally in wake of better than expected operating margins and lower than expected tax incidence.

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