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Ambuja Cem: Peak season demand drives growth
Apr 21, 2012

Ambuja Cements has announced its results for the first quarter of the calendar year 2012 (1QCY12). The company has reported 19% YoY rise in sales and 23% decline in net profits during the quarter. Here is our analysis of the results:

Performance summary
  • On a standalone basis, net sales increase by 19% YoY during the quarter.
  • Barring raw material and power & fuel costs, all cost heads witness moderation, resulting in marginal 0.6% (60 basis points) improvement in operating margins.
  • Other income increases by 70% YoY, while interest costs go up by 22% YoY.
  • There is an exceptional item due to the change in deprecation method and change in accounting policy for employee stock options. As a result, net profits drop by 23% YoY.

Standalone financial performance snapshot
(Rs m) 1QCY11 1QCY12 Change
Net sales 22,071 26,333 19.3%
Expenditure 15,955 18,888 18.4%
Operating profit (EBITDA) 6,116 7,445 21.7%
EBITDA margin 27.7% 28.3%  
Other income 675 1147 69.9%
Depreciation 1,061 1,209 13.9%
Interest 138 168 21.8%
Profit before tax & exceptional items 5,592 7,215 29.0%
Exceptional gain/ (loss) - (2,791)  
Tax 1,517 1,301 -14.2%
Net profit 4,075 3,122 -23.4%
Net profit margin 18.5% 11.9%  
No of shares (m) 1530.2 1535.1  
Diluted EPS (Rs)*   7.4  
P/E (times)   21.8  
*trailing twelve month earnings

What has driven performance in 1QCY12?
  • On a standalone basis, Ambuja Cements' net sales rose by 19.3% YoY during the quarter ended March 2012. Cement sales volumes rose by 9.8% from 5.51 m tonnes in 1QCY11 to 6.05 m tonnes in 1QCY12. The balance addition to the topline was due to improvement in cement realisations.

  • On the cost front, raw materials and power & fuel costs witnessed a rise of 0.5% and 2% respectively (as a percentage of net sales). However, other cost heads showed some moderation which was mainly due to higher sales volumes and better operational efficiency. As a result, operating profits grew by 21.7% YoY. Operating margins improved marginally from 27.7% in 1QCY11 to 28.3% in 1QCY12.

  • Other income rose by 69.9% YoY during the quarter on account of sale of power and significant increase in interest income. On the other hand, interest costs were also higher by 21.8% YoY during the period. Profit before tax and exceptional items rose by 29% YoY.

  • During 1QCY12, Ambuja Cements retrospectively changed its depreciation method on fixed assets pertaining to Captive Power Plants because of which there was an additional depreciation charge. The amount pertaining to earlier years has been reported by the company as an exceptional item. Owing to this, Ambuja Cements' profit after tax for the quarter dropped by 23.4% YoY. The net profit margin declined from 18.5% in 1QCY11 to 11.9% in 1QCY12. If not for the change in depreciation method, the net profit for the current quarter would have been higher by Rs. 1,952.9 m.

  • The effective tax rate for the quarter was lower on account of tax credit pertaining to prior years.

  • In addition, the company has also changed its accounting policy for measuring employee stock options. An amount of Rs 242.5 m has been included under exceptional items for the quarter and calendar year ended December, 2011.

  • During 1QCY12, Ambuja acquired additional 5% stake in Nepal-based Dang Cement Industries Pvt Ltd for Rs 11.3 m. Effectively its stake in the latter now stands at 90% with a total equity investment of Rs 202.5 m.

  • Ambuja has also invested Rs 8.2 (representing 27.27% paid-up equity) m in Wardha Valley Coal Field Pvt Ltd, a joint venture company for captive coal mining.

What to expect?
Ambuja Cements posted healthy growth for the quarter ended March 2012. On account of higher cement sales and operational efficiency it was able to marginally improve its margins compared to last years. But it must be noted that the March quarter typically witnesses higher sales despatches on account of robust construction activity during this period. However, whether the demand will be able to hold in the medium term remains to be seen; especially, because cement sales and prices tend to fall during the monsoon season. At the same time, cost pressures continue to persist.

The Competition Commission of India (CCI) had alleged 39 cement companies for influencing cement prices by forming cartels. Though the final report is not out yet, there are chances that guilty companies could be fined. This could have a negative impact on cement prices going forward.

At the current price of Rs 161, the stock of Ambuja Cements is trading at an enterprise value per tonne (EV/tonne) of Rs 6,790 based on our CY14 estimates. At these valuations, the expected return over the next three years is less than 1% compound annual growth rate (CAGR). As such, we maintain a cautious view on the stock from a 2-3 year perspective.

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