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Ambuja Cem: High energy costs shrink margins - Views on News from Equitymaster
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Ambuja Cem: High energy costs shrink margins
Apr 30, 2011

Ambuja Cements has announced its 1QCY11 results. The company has reported 11% YoY rise in sales and 12% YoY decline in net profits. Here is our analysis of the results.

Performance summary
  • On a standalone basis, net sales increase by 11% YoY led by higher sales volume.
  • Rising input costs drive operating profits lower by almost 2% YoY.
  • Higher depreciation charges further lead the bottomline to drop by 12% YoY.


Standalone financial performance snapshot
(Rs m) 1QCY10 1QCY11 Change
Net sales 19,902 22,071 10.9%
Expenditure 13,675 15,955 16.7%
Operating profit (EBITDA) 6,227 6,116 -1.8%
EBITDA margin 31.3% 27.7%  
Other income 546 675 23.7%
Interest 108 138 27.9%
Depreciation 767 1061 38.3%
Exceptional gains/(losses) 201 0  
Profit before tax/(loss) 6,098 5,592 -8.3%
Tax 1476 1517 2.8%
Net profit 4,622 4,075 -11.8%
Net profit margin 23.2% 18.5%  
No of shares (m)   1530.2  
Diluted EPS (Rs)*   7.9  
P/E (times)   19.7  
*trailing twelve month earnings

What has driven performance in 1QFY11?
  • On a standalone basis, Ambuja Cements' net sales rose by 10.9% YoY during the quarter ended March 2011. The rise in revenue was led by a 6.8% YoY rise in sales volume and a marginal 3.8% YoY increase in cement realisations.

  • However, operating profit dropped by 1.8% YoY on the back of increase in power and fuel costs due to a steep rise in coal prices, higher grid tariff and increase in freight rates.

  • Depreciation charges were higher during the quarter due to capitalisation of a new project in March 2011. As a result, net profits declined by 11.8% YoY during the period. The net profit margin declined from 23.2% in 1QCY10 to 18.5% in 1QCY11.

What to expect?
Though the company's margins have declined on a year-on-year basis, there has been some improvement in the current quarter if compared with the preceding two quarters. However, considering that this is the peak season for cement demand, the trend may not continue going forward.

The cement industry is still reeling under the throes of overcapacity. Slowdown in construction and infrastructure spending has further played spoilsport. Moreover, rising energy costs will continue to pose pressure on the profit margins of the cement players. Hence, in the short to medium term, the scenario for the cement industry seems quite bleak.

At the current price of Rs 154, the stock of Ambuja Cements is trading at an EV/tonne of almost Rs 8,000 based on our CY12 estimates, making it expensively valued as per the replacement cost method.

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