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Ambuja Cem: Muted sales, steady margins - Views on News from Equitymaster
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Ambuja Cem: Muted sales, steady margins
Jul 23, 2014

Ambuja Cements has announced its results for the first quarter of the calendar year 2014. During the quarter, the company's sales and net profit increased by 3.7% YoY and 6.6% YoY respectively. Here is our analysis of the results:

Performance summary
  • On a standalone basis, net sales increased by 3.7% during the quarter driven by marginal rise in sales volumes.
  • Operating profits increased by 6.8% YoY; operating margins expanded marginally from 21.3% in 1QCY13 to 21.9% in 1QCY14.
  • While depreciation charges remained flat, finance costs increased by 21.6% YoY.
  • Net profit increased by 6.6% YoY; net profit margin expanded from 19.2% in 1QCY13 to 19.7% in 1QCY14.

Standalone financial performance snapshot
(Rs m) 1QCY13 1QCY14 Change
Net sales 25,448 26,398 3.7%
Expenditure 20,038 20,622 2.9%
Operating profit (EBITDA) 5,411 5,776 6.8%
EBITDA margin 21.3% 21.9%  
Other income 1616 1,414 -12.5%
Depreciation 1,204 1,197 -0.5%
Interest 132 161 21.6%
Profit before tax & exceptional items 5,690 5,832 2.5%
Exceptional gain/ (loss) - -  
Profit before tax 5,690 5,832 2.5%
Tax 811 632 -22.1%
Effective tax rate 14.3% 10.8%  
Profit after tax 4,879 5,200 6.6%
PAT margin 19.2% 19.7%  
No of shares (m) 1542.5 1546.3  
Diluted EPS (Rs)*   8.6  
P/E (times)   25.1  
*trailing twelve month earnings

What has driven performance in 1QCY14?
  • On a standalone basis, Ambuja Cements' net sales increased by 3.7% YoY during the quarter ended March 2014. The company reported sales volumes of 6.06 million tonnes, marginally higher by 1.7% YoY (5.96 m tonnes in 1QCY13).

  • The company managed to reign over major costs during the quarter with only marginal increase in employee and power and fuel costs. Moreover, raw material costs (including changes in inventory) and other expenses declined by 0.2% YoY and 1.0% YoY respectively (as a percentage of net sales). Owing to improved cost control, operating profits increased by 6.8% YoY in 1QCY14. Operating profit margins expanded from 21.3% in 1QCY13 to 21.9% in 1QCY14.

    Operating cost break-up
    (Rs m) 1QCY13 1QCY14 Change
    Raw materials consumed 1,832 2,017  
    Purchase of stock-in-trade - 8  
    Change in inventory  679 535  
    Total raw materials cost 2,511 2,559 1.9%
    % of Net sales 9.9% 9.7%  
    Employee expenses 1,208 1,291 6.9%
    % of Net sales 4.7% 4.9%  
    Power & fuel expenses 5,495 5,783 5.3%
    % of Net sales 21.6% 21.9%  
    Freight & forwarding expenses 6,408 6,660 3.9%
    % of Net sales 25.2% 25.2%  
    Other expenses 4,417 4,329 -2.0%
    % of Net sales 17.4% 16.4%  
    Total operating expenditure 20,038 20,622 2.9%
    % of Net sales 78.7% 78.1%  

  • Other income reported a decline of 12.5% YoY during the quarter. It must be noted that other income includes write-backs worth Rs 269.7 m towards interest on income tax pertaining to prior years.

  • While depreciation charges remained almost flat, interest expenses increased by 21.6% YoY during the period.

  • Tax expenses during 1QCY14 declined by 22.1% YoY owing to tax credit of Rs 947.5 m relating to earlier years. As such the effective tax rate contracted from 14.3% in 1QCY13 to 10.8% in 1QCY14

  • At the bottomline level, net profit increased by 6.6% YoY. Net profit margins expanded from 19.2% in 1QCY13 to 19.7% in 1QCY14.
What to expect?
Ambuja Cements reported marginal growth in cement sales during the peak construction season of the year. This underscores the fact that there hasn't been any major recovery in the construction and infrastructure sector. However, the company managed to reign over some major cost heads and saw a marginal improvement in its profit margins.

The sluggishness in the housing and infrastructure sector is likely to persist over the medium term. Moreover, other big challenges in the form of high inflation and poor rainfall could further impede the recovery. With the new business-friendly government coming to power at the Centre, the economy is expected to pick up in the coming times. The medium term challenges, notwithstanding, the long term prospects for the Indian economy and the cement sector appear positive owing to the huge demand for housing and infrastructure in the country.

At the current prices of Rs 215.6, the stock is trading at 25.1 times its trailing twelve month standalone earnings per share. We are currently in the process of updating and revising our estimates for the company. We shall share our latest view and target price for the stock soon.

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