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Ambuja Cem: Muted demand mars performance - Views on News from Equitymaster
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Ambuja Cem: Muted demand mars performance
Apr 29, 2015

Ambuja Cements has announced its results for the first quarter of the calendar year 2015. During the quarter, the company's sales and net profit decreased by 8.1% YoY and 38.9% YoY respectively. Here is our analysis of the results:

Performance summary
  • On a standalone basis, net sales decreased by 8.1% during the quarter on account of muted cement demand.
  • Operating profits decreased by 18.1% YoY; operating margins contracted from 21.8% in 1QCY14 to 19.4% in 1QCY15.
  • While other income declined, depreciation charges, finance costs and tax expenses witnessed a substantial surge.
  • As such, net profit during the quarter decreased by 38.9% YoY; net profit margin contracted from 19.7% in 1QCY14 to 13.1% in 1QCY15.

Standalone financial performance snapshot
(Rs m) 1QCY14 1QCY15 Change
Net sales 26,378 24,246 -8.1%
Expenditure 20,622 19,531 -5.3%
Operating profit (EBITDA) 5,757 4,715 -18.1%
EBITDA margin 21.8% 19.4%  
Other income 1434 1,336 -6.8%
Depreciation 1,197 1,578 31.8%
Finance costs 161 214 32.7%
Profit before tax & exceptional items 5,832 4,259 -27.0%
Exceptional gain/ (loss) - -  
Profit before tax 5,832 4,259 -27.0%
Tax 632 1,082 71.3%
Effective tax rate 10.8% 25.4%  
Profit after tax 5,200 3,177 -38.9%
PAT margin 19.7% 13.1%  
No of shares (m) 1,546.3 1,550.0  
Diluted EPS (Rs)*   8.3  
P/E (times)   28.6  
*trailing twelve month earnings

What has driven performance in 1QCY15?
  • On a standalone basis, Ambuja Cements' net sales decreased by 8.1% YoY during the quarter ended March 2015. The drop in the topline was on account of 9% YoY decline in cement sales volumes. Sales volume during the quarter stood at 5.35 million tonnes as against 5.88 million tonnes in 1QCY14.

  • While there was an improvement in net cement realisations, the cost pressures resulted in operating margin compression of nearly 240 basis points from 21.8% in 1QCY14 to 19.4% in 1QCY15.

    Operating cost break-up
    (Rs m) 1QCY14 1QCY15 Change
    Raw materials consumed 2,083 2,072  
    Purchase of stock-in-trade 8 42  
    Change in inventory 535 10  
    Total raw materials cost 2,626 2,123 -19.1%
    % of Net sales 10.0% 8.8%  
    Employee expenses 1,291 1,480 14.7%
    % of Net sales 4.9% 6.1%  
    Power & fuel expenses 5,783 5,368 -7.2%
    % of Net sales 21.9% 22.1%  
    Freight & forwarding expenses 6,484 6,207 -4.3%
    % of Net sales 24.6% 25.6%  
    Other expenses 4,438 4,352 -1.9%
    % of Net sales 16.8% 18.0%  
    Total operating expenditure 20,622 19,531 -5.3%
    % of Net sales 78.2% 80.6%  

  • While the other income declined by 6.8% YoY, non-operating expenses such as depreciation, finance and tax expenses witnessed a significant jump. It must be noted that the there was an additional depreciation charge of Rs 400 million during the quarter on account of implementation of Schedule II of the Companies Act, 2013 with effect from 1st January 2015. The sharp increase in tax expenses is on account of write back of tax provision in 1QCY14.

  • As a result, the bottomline plunged by 38.9% YoY. Net profit margins contracted from 19.7% in 1QCY14 to 13.1% in 1QCY15.
What to expect?
Ambuja's dismal performance during the quarter is a reflection of the overall slowdown in housing demand and low infrastructure spending. The short to medium term outlook for cement demand appears challenging owing to excess cement capacity of roughly 120 million tonnes.

However, with the overall macroeconomic indicators showing signs of improvement and Government's thrust on housing and infrastructure, cement demand is expected to revive over the medium to long term. Moreover, easing commodity prices and lower interest rates should augur well for cement demand in India.

At the current price level, the stock is trading at 28.6 times its trailing twelve month standalone earnings. In our StockSelect recommendation report dated 30 October 2014, we had recommended a BUY on Ambuja Cements with a target price of Rs 288 from a 2-3 year perspective. Thereafter, there had been a significant run up in the stock price and, as a result, we had changed our view on the stock to HOLD. In recent times, there has again been some correction in the stock. In our latest StockSelect recommendation report we re-recommended a Buy on the stock. Taking into view the current stock price level, we continue to maintain our BUY view on the stock.

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