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Ambuja Cements: The extraordinary push! - Views on News from Equitymaster

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Ambuja Cements: The extraordinary push!

Jul 23, 2007

Performance summary
  • Topline grew by almost 12% YoY during the quarter on the back of improved realisations.

  • EBITDA margins contracted by almost 200 basis points (2%) as operating costs grew at a faster rate compared to net sales.

  • However, net profits skyrocketed on account of extraordinary income.

  • Even if one excludes extraordinary income, increased other income and lower finance charges helped net profits report 23% YoY growth.

  • Has declared interim dividend Rs 1.30 per share on account of one time gains and Rs 1.2 per share on account of operational performance.

Financial performance snapshot
(Rs m) 2QCY06 2QCY07 Change 1HCY06 1HCY07 Change
Net sales 13,137 14,644 11.5% 23,877 28,982 21.4%
Expenditure 7,982 9,191 15.1% 15,022 17,898 19.1%
Operating profit (EBITDA) 5,156 5,453 5.8% 8,855 11,084 25.2%
EBITDA margin 39.2% 37.2%   37.1% 38.2%  
Other income (68) 487   106 743 603.9%
Interest 129 (211) -263.6% 239 (193) -180.6%
Depreciation 564 583 3.3% 1,131 1,181 4.5%
Profit before tax/(loss) 4,395 5,567 26.7% 7,591 10,839 42.8%
Extraordinary item - 4,742   343 6,823  
Tax 1,120 1,532 36.8% 532 2,977 460.0%
Net profit 3,275 8,778 168.0% 7,403 14,685 98.4%
Net profit margin 24.9% 59.9%   31.0% 50.7%  
No of shares (m)       1,359 1521  
Diluted EPS (Rs)*         13.7  
P/E (times)         10.0  
*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 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 directly and indirectly has acquired 32% stake in the company. Ambuja Cements Eastern ltd (ACEL) has been merged with Gujarat Ambuja Cements Ltd w.e.f. Jan 1, 2006.

What has driven performance in 2QCY07?
It's all about realisation: The company has not announced the exact quarterly production and despatch numbers. However, considering the May and June monthˇ¦s despatches and the six months despatches, we have arrived at the quarterly numbers, which point towards a marginal decline in production and despatches on year on year basis. Still, the 12% YoY growth in net sales was the result of higher net realisations, which has increased by almost 12% YoY. Thus, the current growth in topline is not led by volume growth but higher price for the commodity.

Cost break-up
(as a % of sales) 2QCY06 2QCY07 1HCY06 1HCY07
Increase/Decrease in stock in trade -0.2% -0.2% 0.0% 0.2%
Consumption of raw material 6.5% 7.3% 6.7% 7.0%
Staff cost 3.1% 3.0% 3.6% 3.2%
Power and fuel 17.1% 16.3% 18.4% 16.2%
Freight and forwarding 19.3% 20.9% 18.6% 20.1%
Other Expenses 15.0% 15.5% 15.7% 14.9%
Total Expenses 60.8% 62.8% 62.9% 61.8%

Costs not in control: The costs continue to march northwards on account of inflationary pressure. The freight costs (increased by 21% YoY) and raw material cost (increased by almost 26% YoY) have gone up significantly during the quarter on a cost per tonne basis. With the rise in liquid fuel prices, the transporters have been increasing freight rates. With increased capacity utilization, costs per tonne basis should come down, however, as the players are operating at almost 100% capacity utilization level there is little (increasing blending ratio) or no scope to cater to rising demand without expanding capacity. Had not the realisations witnessed 12% YoY growth, then the EBITDA margins (contracted by 200 basis points or 2% in 2QCY07 as compared to 2QCY06) would have witnessed further contraction.

One time gains propel net profit growth: The net profits zoomed by 168% YoY on account of extraordinary income. The company during the quarter, completed sale of its property situated at Kalina, Mumbai and recognised profits of approximately of Rs 3 bn. It also received a close to Rs 5 bn consideration for exercising the put option entered with Holcim for 95 m shares of Ambuja Cement India Pvt Ltd, its associate company.

Even if one excludes the extraordinary impact, the net profits reported 23% YoY growth. This can be attributed to the fact that the company on account of improved cash flows has been rationalizing its debt position (debt to equity ratio improved from 0.5 in FY04 to 0.2 in CY06), which has resulted in lower interest outgo costs. Further during the quarter, the other income increased significantly on account of net interest gains and the appreciating rupee helped company report forex gains. Thus, lower finance charges and higher other income led to net margin expansion of 270 basis points.

What to expect?
The stock currently trades at Rs 136, implying a price to earnings multiple of 10 times trailing twelve months earnings. While the merger with Ambuja Cement Eastern has provided the company with a presence in the eastern markets, Holcimˇ¦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 and also to increase its clinker capcity. The company has also outlined plans to step up the capacity of its captive thermal power plant at Ambujanagar in Gujarat in order to curtail costs. In addition to this, it also plans to add a total of 178 MW of captive power at its various plants such as Rabriyawas, Ropar and Maratha.

Though in the medium term, cement realisations will continue to be on higher side, as the majority of the capacity additions announced by the players will start flowing in 2008, we have reservations with respect to current valuations of the stock. At the current juncture, the valuation of the Ambuja stock (at over US$ 150/tonne) considering the replacement cost of the company is trading at the upper end as per our CY09 estimates.

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