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Ambuja Cements: Concerns ahead - Views on News from Equitymaster

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Ambuja Cements: Concerns ahead
Jul 24, 2009

Performance summary
  • Revenues grow by 19.9% YoY on account of sustained demand and steady prices.
  • Growth in operating profits are capped at 9.9% YoY as cost of operations continues to grow at a faster rate as compared to the topline.
  • In 2QCY09, net profit declines by 43.7% YoY on account of absence of extraordinary income which was present in 2QCY08. Growth in profits excluding extraordinary income stands at 7.1% YoY, which is equal to the growth in profit before tax.
  • The board declares an interim dividend of 1.2 per equity share (dividend yield of 1.3%).


Financial performance snapshot
(Rs m) 2QCY08 2QCY09 Change 1HCY08 1HCY09 Change
Net sales 15,750 18,885 19.9% 32,385 37,511 15.8%
Expenditure 11,013 13,677 24.2% 22,416 26,905 20.0%
Operating profit (EBITDA) 4,737 5,208 9.9% 9,969 10,606 6.4%
EBITDA margin 30.1% 27.6%   30.8% 28.3%  
Other income 356 281 -21.0% 689 527 -23.6%
Interest 57 52 -8.8% 114 104 -8.4%
Depreciation 616 704 14.4% 1,234 1,391 12.7%
Profit before tax/(loss) 4,420 4,732 7.1% 9,310 9,638 3.5%
Extraordinary items 3,142 - 3,083 - -100.0%
Profit from extraordinary activities 7,562 4,732 -37.4% 12,393 9,638 -22.2%
Tax 1,791 1,486 -17.1% 3,361 3,051 -9.2%
Net profit  5,770 3,247 -43.7% 9,032 6,587 -27.1%
Net profit margin 36.6% 17.2%   27.9% 17.6%  
No of shares (m)       1,523 1,523  
Diluted EPS (Rs)*         7.6  
P/E (times)         12.4  
*trailing twelve month earnings

What has driven performance in 2QCY09?
  • Ambuja Cements reported a topline growth of 19.9% YoY during 2QCY09 led by higher volumes and realizations. The company reported 8.3% YoY growth in production and 9.1% YoY growth in sales volumes. The export volumes were higher by 175% YoY. Such a whopping growth in exports was the result of the low base effect, as exports were banned by the government in April last year to control inflation. The growth in realizations stood at 9.9% YoY. The growth in demand was sustained on account of delayed monsoon, ongoing construction activity in rural and semi urban areas along with infrastructural activity.

    Cost break- up
    ( % of sales) 2QCY08 2QCY09 1HCY08 1HCY09
    Consumption of raw materials 7.3% 17.1% 10.0% 15.7%
    Staff cost 4.1% 3.6% 4.0% 3.4%
    Power and fuel 20.5% 19.9% 18.8% 20.6%
    Outward freight 20.1% 17.4% 19.4% 17.9%
    Other expenditure 17.9% 14.4% 16.9% 14.2%

  • Operating profits growth was capped at 9.9% YoY as cost of operations continued to grow at a faster rate as compared to the topline. While power and fuel costs were moderate, the overall cost of operation was pushed upwards by higher raw material costs. The cost of raw materials such as gypsum was higher during the quarter. Moreover, the company’s clinkerisation plant in Maharashtra was shut down for a short period during the quarter for repairs, which forced the company to source clinker externally. Thus, rising cost of operations contracted EBITDA margins by 2.5% YoY during 2QCY09.

  • Net profits declined by 43.7% YoY during the quarter on account of absence of extraordinary income. During the same quarter last year, the company had reported a profit on sale of investments in Ambuja Cements India Pvt. Ltd. to Holderind Investments Ltd. Growth in profits excluding extraordinary income stands at 7.1% YoY, which equal to the growth in profit before tax.

What to expect?
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. Ambuja Cements’ expansion plans are progressing as per schedule. Although the company has fetched better realisations, we do not foresee the trend to continue in the future with new capacities coming on board. Infact, a bulk of the additional capacities are expected to be operational, starting second half of CY09, which will exert pressure on margins.

At the current price of Rs 95, the stock is trading at an enterprise value (EV/tonne) of over Rs 5,000 as per our CY11 estimates. The stock is trading over the upper end of our valuation band and hence we advise investors to practice caution while investing in the stock. We shall soon update our research report on the company, as the company has outperformed our estimates. The unexpected impressive numbers were the result of delayed monsoons apart from government’s increased focus towards infrastructure that sustained the demand for the commodity and prices.

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