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Ambuja Cem: Subdued demand hits profits
Jul 25, 2013

Ambuja Cements has announced its results for the second quarter of the calendar year 2013 (2QCY13). During the quarter, the company’s sales declined by 8.6% YoY while net profits dropped by 30.9% YoY. Here is our analysis of the results:

Performance summary
  • On a standalone basis, net sales declined by 8.6% during the quarter owing to poor sales volumes.
  • Operating profits dipped by 32.1% YoY; operating margins declined from 28.3% in 2QCY12 to 21% in 2QCY13.
  • While other income increased by 19.3% YoY, interest and tax expenses declined by 5.3% YoY and 34.8% YoY respectively.
  • Owing to sluggish sales and weak operating performance, net profits declined by 30.9% YoY. Net margins dipped from 18.3% in 2QCY12 to 13.8% in 2QCY13.

Standalone financial performance snapshot
(Rs m) 2QCY12 2QCY13 Change 1HCY12 1HCY13 Change
Net sales 25,656 23,457 -8.6% 51,971 48,906 -5.9%
Expenditure 18,406 18,537 0.7% 37,251 38,576 3.6%
Operating profit (EBITDA) 7,251 4,920 -32.1% 14,720 10,330 -29.8%
EBITDA margin 28.3% 21.0%   28.3% 21.1%  
Other income 881 1,051 19.3% 2003 2,669 33.2%
Depreciation 1,215 1,223 0.7% 2,424 2,427 0.1%
Interest 180 171 -5.3% 348 303 -13.0%
Profit before tax & exceptional items 6,736 4,578 -32.0% 13,951 10,268 -26.4%
Exceptional gain/ (loss) -   -       (2,791) -    
Profit before tax 6,736 5,690 -15.5%  11,160  10,268 -8.0%
Tax 2,047 1,336 -34.8% 3,348 2,147 -35.9%
Effective tax rate 30.4% 23.5%   30.0% 20.9%  
Net profit 4,689 3,242 -30.9% 7,811 8,121 4.0%
Net profit margin 18.3% 13.8%   15.0% 16.6%  
No of shares (m) 1538.1 1543.8   1538.1 1543.8  
Diluted EPS (Rs)*         8.6  
P/E (times)         19.6  
*trailing twelve month earnings

What has driven performance in 2QCY13?

  • On a standalone basis, Ambuja Cements' net sales declined by 8.6% YoY during the quarter ended June 2013. The company reported sales volumes of 5.38 m tonnes, lower by 2.9% YoY (5.54 m tonnes in 2QCY12). Cement realisations were also subdued owing to the weak demand scenario.
  • On the cost front, all major cost heads barring raw material costs witnessed pressure. While raw material costs declined by 0.1% YoY (as a percentage of net sales), freight & forwarding expenses, other expenses, employee expenses and power & fuel expenses increased by 3.3% YoY, 2.9% YoY, 0.8% YoY and 0.5% YoY respectively (as a percentage of net sales).

    Operating cost break-up
    (Rs m) 2QCY12 2QCY13 Change
    Raw materials consumed 1,745 1,655  
    Change in inventory  (584)  (625)  
    Total raw materials cost 1,161 1,031 -11.2%
    % of Net sales 4.5% 4.4%  
    Employee expenses 1,237 1,320 6.7%
    % of Net sales 4.8% 5.6%  
    Power & fuel expenses 5,964 5,560 -6.8%
    % of Net sales 23.2% 23.7%  
    Freight & forwarding expenses 5,881 6,142 4.4%
    % of Net sales 22.9% 26.2%  
    Other expenses 4,163 4,485 7.7%
    % of Net sales 16.2% 19.1%  
    Total operating expenditure 18,406 18,537 0.7%
    % of Net sales 71.7% 79.0%  

  • Operating profits dipped by 32.1% YoY in 2QCY13. Operating profit margins declined from 28.3% in 2QCY12 to 21% in 2QCY13.

  • Other income rose by 19.3% YoY during the quarter. While depreciation charges remained almost at similar levels as 2QCY12, interest expenses declined by 5.3% YoY during the period.

  • The effective tax rate was substantially lower during the quarter at 23.5% as against 30.4% in 2QCY12.

  • At the bottomline level, net profit declined by 30.9% YoY. Net margins contracted from 18.3% in 2QCY12 to 13.8% in 2QCY13.

  • The company's board of directors has declared an interim dividend of Rs 1.4 per share (face value Rs 2). The record date has been fixed as July 31, 2013.

What to expect?

Weak cement demand owing to slowdown in the housing and infrastructure sector has impacted the performance of Ambuja Cements during the quarter. Given the overall slowdown in the economy, the outlook for the cement sector for the short to medium term remains subdued. However, we expect the sector to grow at about 7% over the next few years driven by demand for housing and infrastructure in the country.

On July 24, 2013, Swiss-based parent firm Holcim announced a restructuring plan for its Indian subsidiaries Ambuja Cements and ACC. As per the proposal, Ambuja would buy 24% stake in Holcim India Pvt Ltd for Rs 35 bn in cash. For the balance 76% stake, it would issue 584 million shares to parent firm Holcim. Thereby, Holcim India Pvt Ltd would be amalgamated with Ambuja and its 9.8% stake in Ambuja would get cancelled. Consequently, Holcim's shareholding in Ambuja would increase to 61.39%, while Holcim India's 50.01% stake in ACC would be taken over by Ambuja. As per the company's presentation, the Holcim India/ Ambuja swap ratio has been determined at 7.4. The derived swap ratio for Ambuja/ ACC stands at 6.6. Through this restructuring deal, Ambuja Cements would become the flagship company of Holcim's Indian operations. The transaction is likely to be completed by the second or third quarter of calendar year 2014, subject to various approvals. The company has also informed about its intention to acquire upto 10% additional stake in ACC without triggering a mandatory open offer.

As per the company's management, the restructuring deal would result in operational gains for both ACC and Ambuja. One major benefit would be the optimization of the supply chain whereby both the companies would swap clinker and cement. Secondly, it would result in reduction of certain fixed costs owing to shared services as well facilitate better procurement. The synergies are expected to result in benefits of upto Rs 9 bn (US$ 150 million) over the next two years. It must be noted that both companies will continue to operate as listed entities with their existing brands and marketing teams.

As of quarter ended June 2013, Ambuja has cash and cash equivalents (current investments) of Rs 37.1 bn. The restructuring deal will result in outflow of Rs 35 bn cash from Ambuja's books.

The company's board of directors has approved setting up of 2.17 million tonne per annum (MTPA) greenfield clinkerization project at Marwar Mundwa, Rajasthan. In addition, there would be 3 clinker grinding units 1.5 MTPA capacity each at Marwar Mundwa (Rajasthan), Dadri - Phase II (Uttar Pradesh) and Osara (Madhya Pradesh). The estimated cost of the project is about Rs 35 bn.

At the current prices of Rs 171, the stock is trading at 19.9 times its trailing twelve month standalone earnings. Given the high valuations, we continue to maintain our 'Sell' view on the stock from a 2-year perspective.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also, within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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