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Ambuja Cem.: Domestic volumes drive growth - Views on News from Equitymaster

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Ambuja Cem.: Domestic volumes drive growth

Jul 23, 2010

Ambuja Cements has announced its 2QCY10 results. The company has reported a 10.8% YoY and 20.5% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues grow by 10.8% YoY. The growth has come in on account of higher domestic volumes.
  • During the quarter operating costs report slower growth resulting into EBITDA margin expansion of 3.5%.
  • While operating profits report 25.7% YoY growth, growth in bottomline stands at 21% YoY.
  • Lower other income, higher depreciation and interest expenses restricted the growth in earnings.
  • During the quarter the company has subscribed to 15 m redeemable cumulative preference shares of R 10 each carrying dividend of 6.5% at par in Counto Microfine Products Pvt. Ltd.
  • The board of the company has recommended interim dividend of Rs 1.2 per share.


Financial performance snapshot
(Rs m) 2QCY09 2QCY10 Change 1HCY09 1HCY10 Change
Net sales 18,474 20,476 10.8% 36,930 40,377 9.3%
Expenditure 13,677 14,444 5.6% 26,905 28,119 4.5%
Operating profit (EBITDA) 4,797 6,032 25.7% 10,025 12,258 22.3%
EBITDA margin 26.0% 29.5%   27.1% 30.4%  
Other income 692 667 -3.5% 1,108 1,213 9.5%
Interest 52 81 55.5% 104 189 80.8%
Depreciation 704 1,001 42.1% 1,391 1,768 27.1%
Profit before tax/(loss) 4,732 5,618 18.7% 9,638 11,515 19.5%
Exceptional item - -   - 201  
Tax 1,486 1,705 14.8% 3,051 3,182 4.3%
Net profit 3,247 3,912 20.5% 6,587 8,534 29.6%
Net profit margin 17.6% 19.1%   17.8% 21.1%  
No of shares (m)       1,523 1,525  
Diluted EPS (Rs)*         9.3  
P/E (times)         12.3  
*trailing twelve month earnings

What has driven performance in 2QCY10?
  • Ambuja Cementsí revenues grew by 10.8% YoY during 2QCY10. The growth has been supported by higher volumes domestic volumes that grew by 12.6% YoY. Fall in exports has capped overall growth in volumes at 10.8% YoY. Thus the growth has been supported by better demand for the commodity in the domestic markets.

  • Demand for the commodity moderated during the quarter primarily on account of it being a slack season for construction activity. The growth in eastern and northern regions remained fairly robust, while demand in southern and western region markets remained sluggish.

  • Slower growth in cost of operation led operating profits grew at a faster rate of 25.7% YoY. During the quarter the company was able to lower cost of raw material. The same was the result of cease on clinker purchases during the quarter following commissioning of clinkerisation unit. Consumption of raw materials was lower by 73.6% YoY during 2QCY10. The other cost heads reported growth owing to general rise in price level and higher fuel costs. However, substantially fall in cots of consumption materials led to 3.5% expansion in EBITDA margins.

  • Good show at the operating level led to nearly 21% YoY growth in bottomline. Net profits grew at a slower pace compared to operating profits. The growth in earnings was restricted by lower other income, higher depreciation and interest costs.

What to expect?
Ambuja Cementsí expansion plans are progressing as per schedule. The company cement production capacity has been scaled up to 25 MTPA. It plans to scale up its capacity to 27 MTPA by the end of 2010 to maintain its market leadership and be a part of the growth process. To achieve the same the company plans to add new production facilities and captive power plants to keep check on rising cost of operation. During the quarter the company has commissioned 30 MW thermal power plant. The company has also outlined logistics projects (three new ships under construction, focusing on rail connectivity at several locations) to improve connectivity and arrest growth in cost of operation.

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. Thus volume would be higher. However, the margin may come under pressure. This is on two counts. Primarily on account of rising input costs. Second being, new capacities coming on board which are expected to exert pressure on cement prices in the near to medium term.

At the current price of Rs 114, the stock is fairly valued at over Rs 5,800 on an enterprise value per tonne (EV/tonne) basis as per our CY12 estimates. We advise investors to practice caution as the stock is trading at the upper end of our valuation band.

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