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Ambuja Cements: The other income boost
Apr 23, 2007

Performance summary
Ambuja Cements (Gujarat Ambuja), a leading cement player in the country, has reported 34% YoY growth in topline and a 52% YoY growth in operating profits during 1QCY07 mainly on account of improved sales realisations. Led by a substantial improvement in operating margins and lower interest costs, the company has reported 43% YoY growth in net profits. The effect of one-time profit from sale of its holdings in companies and exchange rate fluctuations has almost nullified huge jump in taxes, which otherwise would have slowed down profit growth considerably.

Financial performance snapshot
(Rs m) 1QCY06 1QCY07 Change
Net sales 10,740 14,338 33.5%
Expenditure 7,041 8,708 23.7%
Operating profit (EBITDA) 3,699 5,631 52.2%
EBITDA margin 34.4% 39.3%  
Other income 571 2,664 366.8%
Interest 110 18 -83.8%
Depreciation 566 598 5.6%
Profit before tax/(loss) 3,593 7,679 113.7%
Tax (534) 1,772  
Net profit 4,127 5,907 43.1%
Net profit margin 38.4% 41.2%  
No of shares (m) 1,355 1,521  
Diluted EPS (Rs)*   10.1  
P/E (times)   11.3  
*trailing twelve month earnings

What is the company’s business?
Gujarat Ambuja, with a total consolidated capacity of 16 million tonnes (MT), is the third largest cement producer in the country. It has close to 10% of the country's total cement capacity and has presence in the western, northern and eastern regions as its principal markets. 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), over a period of time has acquired 27.9% stake in the company. Ambuja Cements Eastern ltd (ACEL) has been merged with Gujarat Ambuja Cements Ltd w.e.f. Jan 1, 2006.

The company has changed its name from ‘Gujarat Ambuja Cements Ltd’ to ‘Ambuja Cements Ltd’, with effect from April 05, 2007.

What has driven performance in 1QCY07?
Its realisations again: While the industry has grown by 6.6%YoY during the quarter, the company reported merely 3%YoY growth in despatches. As in the recent past demand has been growing at a faster clip as compared to production, prices have risen much faster than anticipated. The 34% YoY growth in net sales has been achieved on account of improved sales realisations. During the quarter, net realisations have increased by almost 29% YoY. The strategic location of the company enables it to serve export markets and this further boosts realisations. Apart from the northern and western regions, the company has also started serving the eastern region (on account of the merger of Ambuja Cement Eastern with itself), the one that is witnessing robust demand growth on account of infrastructural developments.

Cost inflation dampens margin expansion: Most of the cost heads as a percentage of sales have declined in 1QCY07, due mainly to significant improvement in realizations. However, the total expenditure of the company grew by almost 20% YoY on cost per tonne basis. Though the company transports 21% of cement by sea, the cheapest mode of transport, its freight costs have increased significantly. This can be attributed to the fact that transporters have been increasing freight rates on the back of rising liquid fuel prices. While other cost heads have also increased on a per tonne basis, on account of a favourable pricing scenario and decent growth in despatches, operating profits grew by almost 52%YoY.

Cost break-up (as a % of sales) 1QCY06 1QCY07
Consumption of raw material 7.1% 7.4%
Staff cost 4.2% 3.5%
Power and fuel 19.9% 16.2%
Freight and forwarding 17.8% 19.4%
Other Expenses 16.5% 14.3%
Total Expenses 65.6% 60.7%

Other income effect: On account of buoyant prices, the net profits have grown by almost 43%YoY during 1QCY07. The improved cash flows have enabled the company to retire considerable amount of debt (debt to equity ratio has come down to 0.2 in CY06 as compared to 0.4 in FY05) resulting into reduced interest outgo costs, which further aided bottomline growth. Also, approximately five-fold growth in other income has helped offset almost completely, the impact of a huge jump in tax outgo (based on taxable income and not book profits) and has led to a substantial growth in net profits. In CY06, ACEL was merged with the company and on account of the merger, recomputed tax liability was written back. If the other income effect is excluded, then the net profit margins have actually contracted by 1050 basis points (10.5%) owing to the higher tax outgo and higher depreciation.

What to expect?
The stock currently trades at Rs 115, implying a price to earnings multiple of 11 times trailing twelve months earnings. While the merger with Ambuja Cement Eastern has provided the company with a presence in the eastern markets, Holcim’s expertise will benefit it in the long term. The company has outlined investment outlay of Rs 35 bn to increase its capacity from the current 16 MT to 22 MT by 2009.

Currently, the stock is trading at over US$ 200 per tonne, which is quite expensive, considering the replacement cost of the company. We shall soon update our earning estimates for the company.

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