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Ambuja Cements: Cost takes toll on margins - Views on News from Equitymaster
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Ambuja Cements: Cost takes toll on margins
Apr 25, 2008

Performance summary
  • During 1QCY08, the company witnesses 17% YoY growth in topline, largely led by volume growth. Domestic despatches are higher by 16% YoY, while exports volumes fall by 50% YoY.

  • Operating costs outpace topline growth, which resulting in a 9% YoY fall in operating profits in 1QCY08.

  • The poor performance at the operating level boils down to the bottomline resulting in a 42% YoY fall in net profits.

  • If one excludes extraordinary item during both the quarters, then the net profits register a staid 2% YoY growth.

Financial performance snapshot
(Rs m) 1QCY07 1QCY08 Change
Net sales 14,195 16,549 16.6%
Expenditure 8,536 11,389 33.4%
Operating profit (EBITDA) 5,659 5,160 -8.8%
EBITDA margin 39.9% 31.2%  
Other income 330 406 23.0%
Interest 119 57 -52.3%
Depreciation 598 618 3.4%
Profit before tax/(loss) 5,272 4,890 -7.2%
Extraordinary items 2,408 (59) -102.4%
Tax 2,017 1,570 -22.2%
Net profit 5,663 3,262 -42.4%
Net profit margin 39.9% 19.7%  
No of shares (m) 1521 1522  
Diluted EPS (Rs)*   10.7  
P/E (times)   10.6  
*trailing twelve month earnings

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 1QCY08?
  • During 1QCY08, the company witnessed 16% YoY growth in domestic despatches, while export volumes were lower by 50% YoY. In order to cater to the domestic demand, the company had curtailed its exports, which has resulted in lower export volumes. This highlights the fact that that 17% YoY growth in revenues has largely been a result of robust growth in volumes rather than realisations.

    Cost break up
    (% of sales) 1QCY07 1QCY08
    Consumption of raw materials 7.4% 12.7%
    Staff cost 3.5% 4.0%
    Power and fuel 16.3% 17.0%
    Outward freight 19.6% 19.3%
    Other expenditure 13.3% 15.8%

  • Owing to competitive market conditions, the company was unable to pass on the increase in costs by way of price hikes. Further, even after continuous efforts to improve logistics and operational efficiency, the company was unable to fully compensate for the hike in input costs such as coal, power etc. The strained profits were further pressurised by higher indirect taxes. This resulted in the 9% YoY decline in operating profits.

  • The poor performance at the operating level boiled down to the bottomline resulting in a huge 42% YoY fall in net profits. Having said that, if one excludes the extraordinary items during both the quarters, then the net profits registered a muted 2% YoY growth. The same can be attributed to lower interest costs and tax expenses. During the same period last year, the company realised Rs 2,408 m as profit from sale of stake in subsidiaries and joint ventures, while during 1QCY08 the company recognised a further provision for diminution in the value of investment in its subsidiary company Ceylon Ambuja Cements Pvt Ltd amounting to Rs 59 m.

  • Further, had the company not restated the provision for current tax then the net profits would have been higher by Rs 245 m. This was done as the company has revised its estimate of provision of income tax to recognise provision on sales tax incentive, which had been earlier treated as capital receipt.

What to expect?
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 by 6 MT to 25 MT by CY09 and also to increase its clinker capacity. During the quarter the company has added 1 MT grinding facility at Surat. Further, in anticipation of increased volumes to be transported on the coastal route, the company has ordered three new vessels at a total cost of approximately Rs 1,500 m.

While we do not doubt the growth prospects of the company, we have reservations with respect to current valuations of the stock. At the current price of Rs 115, the stock is trading at an enterprise value per tonne (EV/tonne) of US$ 140 as per our CY10 estimates. Since this is at the upper end of our valuation band, we advise investors to practice caution.

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