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Ambuja Cements: Hit at the operating level - Views on News from Equitymaster

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Ambuja Cements: Hit at the operating level

Apr 23, 2009

Performance summary
  • The 6% YoY growth both in volumes and realisations support 12% YoY growth in topline during 1QCY09.
  • Higher cost of operations arrests growth in operating profits at 2% YoY.
  • Profits are flat at the PBT level, while bottomline expands by 2.4% YoY. If one excludes extraordinary expense incurred in 1QCY08, bottomline growth is also stagnant.

Financial performance snapshot
(Rs m) 1QCY08 1QCY09 Change
Net sales 16,549 18,476 11.6%
Expenditure 11,403 13,228 16.0%
Operating profit (EBITDA) 5,146 5,247 2.0%
EBITDA margin 31.1% 28.4%  
Other income 420 409 -2.5%
Interest 57 65 13.9%
Depreciation 618 686 11.0%
Profit before tax/(loss) 4,890 4,905 0.3%
Extraordinary Item (59) -  
Tax 1,570 1,565 -0.3%
Net profit 3,262 3,341 2.4%
Net profit margin 19.7% 18.1%  
No of shares (m) 1,522 1,486.9  
Diluted EPS (Rs)*   9.5  
P/E (times)   8.6  
*trailing twelve month earnings

What has driven performance in 1QCY09?
  • On a standalone basis, Ambuja Cements reported topline growth of 12% YoY during 1QCY09 backed by higher volumes and better realisations. While sales volumes were up 5.8% YoY, realisations grew by 5.5% YoY. Semi and rural urban areas have been less affected by the slowdown in the IT and financial sector. Moreover, the year gone by has been a good crop year that has left higher disposable incomes in the hands of rural people dependant on agricultural income. Apart from rural housing, ongoing infrastructural projects and stimulus packages announced by the government reinforced the 9% YoY growth of the industry.

    Cost break up
    (as a % of sales) 1QCY08 1QCY09
    Consumption of raw materials 12.7% 14.4%
    Staff cost 4.0% 3.1%
    Power and fuel 17.3% 21.6%
    Outward freight 18.8% 18.5%
    Other expenditure 16.1% 14.0%

  • Cost of operations outpaced growth in topline resulting into 2.7% contraction in EBITDA margins. Despite improved productivity of the company’s operations, cost of operations rose by 16% YoY on account of an increase in raw material costs and higher coal prices (opening inventory), which fuelled the cost of power.

  • At the profit before tax (PBT) level, the company witnessed marginal growth. This was mainly on account of higher interest outgo and replacement cost, apart from muted growth reported at the operating level.

  • Despite profits before tax being flat, net profit growth was a tad higher at 2.4% YoY. If one excludes the extraordinary expense (diminution in value of investments) incurred during the same quarter last year, bottomline also reported a meager growth of 0.6%.

What to expect?
The prospects of the cement sector for the long term remain intact. This is mainly on account of government initiatives in the infrastructure and housing sectors that are likely to be the main drivers of growth for the industry in the long run. Ambuja Cements’ expansion plans are progressing as per schedule. Although the company has fetched better realisations, we do not foresee the trend continuing going forward with new capacities coming on stream. Infact, bulk of the additional capacities are expected to be operational during the second half of CY09. Hence, we expect the company to witness further pressure on margins.

At the current price of Rs 82, the stock is trading at an enterprise value (EV/tonne) of almost Rs 5,000 as per our CY10 estimates. The stock is trading over the upper end of our valuation band and hence we advise investors to practice caution while investing in the stock. We shall soon update our research report on the company.

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Aug 23, 2019 (Close)


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