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Ambuja Cements: Rising costs hit profits - Views on News from Equitymaster

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Ambuja Cements: Rising costs hit profits

Jul 25, 2008

Performance summary
  • During 1HCY08, topline grows by 12% YoY, led by growth in volumes and realisations.

  • Operating costs outpace topline growth resulting in 8.1% YoY contraction in EBITDA margins.

  • The poor performance at the operating level percolates down to the bottomline resulting in a 36% YoY fall in net profits.

  • If one excludes the extraordinary item during both the quarters, then the net profits decline marginally by 2% YoY.

  • The board recommends an interim dividend of Rs 1.2 per share (dividend yield of 1%).

Financial performance snapshot
(Rs m) 2QCY07 2QCY08 Change 1HCY07 1HCY08 Change
Net sales 14,507 15,698 8.2% 28,703 32,246 12.3%
Expenditure 9,029 10,955 21.3% 17,564 22,344 27.2%
Operating profit (EBITDA) 5,479 4,743 -13.4% 11,138 9,903 -11.1%
EBITDA margin 37.8% 30.2% 38.8% 30.7%
Other income 765 350 -54.3% 1,095 755 -31.0%
Interest 94 57 -39.1% 213 114 -46.5%
Depreciation 583 616 5.6% 1,181 1,234 4.5%
Profit before tax/(loss) 5,568 4,420 -20.6% 10,839 9,310 -14.1%
Extraordinary item 5,747 3,142 -45.3% 8,154 3,083 -62.2%
Tax 2,764 1,791 -35.2% 4,781 3,361 -29.7%
Net profit 8,550 5,770 -32.5% 14,213 9,032 -36.4%
Net profit margin 58.9% 36.8% 49.5% 28.0%
No of shares (m) 1,520 1,523
Diluted EPS (Rs)* 8.2
P/E (times) 10.1
*trailing twelve month earnings

What has driven performance in 1HCY08?
  • Ambuja Cementís topline grew by 12% YoY in 1HCY08 on the back of growth in volumes and realisations. For the half-year ended CY08, the company witnessed 6% YoY growth both in volumes and realisations. In 2QCY08, the topline growth of 8% YoY was driven by a combination of moderate price increase of 5% YoY and change in mix of exports and domestic dispatches. The domestic dispatches grew by 5% YoY, while exports declined by 70% YoY. As a result, total dispatches remained more or less flat during the 2QCY08. The decline in exports can be partially attributed to the ban put on exports.

    Cost break-up
    (as a % of sales) 2QCY07 2QCY08 1HCY07 1HCY08
    Increase/Decrease in stock in trade -0.2% -3.9% 0.2% -0.3%
    Consumption of raw material 7.4% 11.2% 7.1% 10.4%
    Staff cost 3.0% 4.1% 3.3% 4.0%
    Power and fuel 16.5% 20.4% 16.4% 18.7%
    Freight and forwarding 21.1% 20.7% 20.3% 20.0%
    Other Expenses 14.5% 17.3% 13.9% 16.5%

  • Unrelenting cost pressures dragged down EBITDA margins by almost 8% YoY in 1HCY08. The overall cost of operation scaled up on account of inflationary pressures. However, rising power and fuel costs tool its toll on the companyís profitability. Further, fuel prices resulted in increased transportation costs, which were also impacted by the transportersí increasing freight rates. The company is dependant on imported coal for power generation and the prices of the same have moved in line with the global crude prices. Thus, rising cost of operations, which increased by 20% YoY on a cost per tonne basis during the 1HCY08 resulted in an 11% YoY fall in operating profits.

  • The poor performance at the operating level boiled down to the bottomline resulting in a 36% YoY fall in net profits. The drop in net profits is steeper as compared to the fall in operating profits on account of higher extraordinary income earned during the same period last year. If one excludes extraordinary item during both the quarters, then the net profits declined marginally by 2% YoY growth and was attributed to lower interest costs and tax expenses. In 1HCY08, the extraordinary item included the gain on sale of stake in Ambuja Cements India Pvt. Ltd to Holderind Investments Ltd.

What to expect?
The prospects of the cement sector for the long term remain intact on account of infrastructural activity taking place in the economy. However, in the near to medium term, the companyís margins are likely to remain under pressure on account of two factors namely the escalating cost of operations and planned capacities coming on stream causing supply to outstrip demand.

In order to keep its costs under control the company is planning to set up captive power plants, it has also outlined investments to the tune of Rs 2.5 bn in ships and bulk terminal facilities to improve logistics capabilities for coastal traffic. In order to maintain its market share and cater to the long term demand for the commodity, the company has outlined total investments of Rs 35 bn to add 6 MT by 2009 to the total current cement capacity of 18.5 MTPA.

At the current price of Rs 83, the stock is fairly valued at over US$ 100 (over Rs 4,000) on an enterprise value per tonne (EV/tonne) basis as per our CY10 estimates.

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