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Ambuja Cem: Lower cement prices mar profits
Jul 28, 2015

Ambuja Cements has announced its results for the second quarter of the calendar year 2015. During the quarter, the company's sales and net profit decreased by 7.9% YoY and 44.6% YoY respectively. Here is our analysis of the results:

Performance summary
  • On a standalone basis, net sales decreased by 7.9% during the quarter on account of muted cement demand and poor cement realisations.
  • Operating profits decreased by 36.2% YoY; operating margins contracted from 21.2% in 2QCY14 to 14.7% in 2QCY15.
  • While other income declined, depreciation charges and finance costs witnessed a substantial surge.
  • As such, net profit during the quarter decreased by 44.6% YoY; net profit margin contracted from 15.1% in 2QCY14 to 9.1% in 2QCY15.
  • During the first half of the calendar year 2015, sales and profit decreased by 8.0% YoY and 41.4% YoY respectively.

Standalone financial performance snapshot
(Rs m) 2QCY14 2QCY15 Change 1HCY14 1HCY15 Change
Net sales 27,064 24,928 -7.9% 53,442 49,173 -8.0%
Expenditure 21,323 21,267 -0.3% 41,944 40,798 -2.7%
Operating profit (EBITDA) 5,741 3,661 -36.2% 11,498 8,375 -27.2%
EBITDA margin 21.2% 14.7%   21.5% 17.0%  
Other income 1518 1,234 -18.7% 2951 2,570 -12.9%
Depreciation 1,242 1,485 19.6% 2,439 3,063 25.6%
Finance costs 203 316 55.9% 364 529 45.6%
Profit before tax & exceptional items 5,815 3,094 -46.8% 11,647 7,353 -36.9%
Exceptional gain/ (loss) - -   - -  
Profit before tax 5,815 3,094 -46.8% 11,647 7,353 -36.9%
Tax 1,728 831 -51.9% 2,360 1,913 -18.9%
Effective tax rate 29.7% 26.8%   20.3% 26.0%  
Profit after tax 4,087 2,264 -44.6% 9,287 5,440 -41.4%
PAT margin 15.1% 9.1%   17.4% 11.1%  
No of shares (m)       1,547.2 1,551.9  
Diluted EPS (Rs)*         7.2  
P/E (times)         32.4  
*trailing twelve month earnings

What has driven performance in 2QCY15?
  • On a standalone basis, Ambuja Cements' net sales decreased by 7.9% YoY during the quarter ended June 2015. The drop in the topline was on account of 10% YoY decline in cement selling price. Sales volume during the quarter was marginally higher by 1.6% YoY at 5.88 million tonnes as against 5.79 million tonnes in 2QCY14.

  • Despite lower cost of input materials, the 10% drop in cement realisations resulted in operating margin compression of nearly 650 basis points from 21.2% in 2QCY14 to 14.7% in 2QCY15.

    Operating cost break-up
    (Rs m) 2QCY14 2QCY15 Change
    Raw materials consumed 2,204 2,172  
    Purchase of stock-in-trade 59 -  
    Change in inventory (520) (390)  
    Total raw materials cost 1,743 1,782 2.3%
    % of Net sales 6.4% 7.2%  
    Employee expenses 1,407 1,501 6.7%
    % of Net sales 5.2% 6.0%  
    Power & fuel expenses 6,242 5,843 -6.4%
    % of Net sales 23.1% 23.4%  
    Freight & forwarding expenses 6,809 7,151 5.0%
    % of Net sales 25.2% 28.7%  
    Other expenses 5,122 4,989 -2.6%
    % of Net sales 18.9% 20.0%  
    Total operating expenditure 21,323 21,267 -0.3%
    % of Net sales 78.8% 85.3%  

  • While the other income declined by 18.7% YoY, non-operating expenses such as depreciation and finance costs witnessed a significant jump. It must be noted that the there was an additional depreciation charge of Rs 220 million during the quarter on account of implementation of Schedule II of the Companies Act, 2013 with effect from 1st January 2015.

  • As a result, the bottomline plunged by 44.6% YoY. Net profit margins contracted from 15.1% in 2QCY14 to 9.1% in 2QCY15.
What to expect?
Nearly flat volume growth coupled with a significant decline in cement prices reflects the sluggishness in cement demand and the excess cement capacity in the industry. In the short term, cement demand is unlike to witness any material recovery. The June-September quarter is usually a slack season due to the monsoon rains. How the major economic factors shape up towards the end of the calendar year will determine cement demand in the medium term. In the medium term, growth and profitability are both likely to remain under pressure.

The long term outlook for the cement sector remains positive as there are multiple growth drivers. An expected recovery in the macroeconomy, government's focus on infrastructure development and new projects of Smart Cities and Housing For All will be key triggers for uptick in cement demand in the coming times. Further softening of interest rates may also revive retail home buying.

Ambuja Cements' board of directors has recommended an interim dividend of Rs 1.6 per equity share of face value Rs 2 each.

At the current price level of Rs 232, the stock is trading at 32.4 times its trailing twelve month standalone earnings. Please note that in our StockSelect report dated 26 May 2015, we had shared our updated target price of Rs 291 based on CY17 estimates. Given the current stock price level and the expected returns, we continue to recommend a 'Hold' view on Ambuja Cements.

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