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Ambuja Cem: High operating costs hurt margins - Views on News from Equitymaster

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Ambuja Cem: High operating costs hurt margins
Aug 1, 2011

Ambuja Cements has announced its 2QCY11 results. The company has reported 11% YoY rise in sales and 12% YoY decline in net profits. Here is our analysis of the results.

Performance summary
  • On a standalone basis, net sales increase by 6% YoY.
  • Rising input costs drive operating profits lower by 3% YoY.
  • Higher operating expenses and interest charges lead the bottomline to drop by 11% YoY.


(Rs m) 2QCY10 2QCY11 Change 1HCY10 1HCY11 Change
Net sales 20,476 21,733 6.1% 40,377 43,803 8.5%
Expenditure 14,444 15,906 10.1% 28,119 31,861 13.3%
Operating profit (EBITDA) 6,032 5,826 -3.4% 12,258 11,942 -2.6%
EBITDA margin 29.5% 26.8%   30.4% 27.3%  
Other income 667 720 7.8% 1,213 1,395 15.0%
Interest 81 152 87.0% 189 290 53.5%
Depreciation 1,001 1,074 7.3% 1768 2,135 20.8%
Exceptional gains/(losses) 0 0   201 0  
Profit before tax/(loss) 5,618 5,321 -5.3% 11,716 10,912 -6.9%
Tax 1705 1845 8.2% 3,182 3,362 5.7%
Net profit 3,912 3,475 -11.2% 8,534 7,550 -11.5%
Net profit margin 19.1% 16.0%   21.1% 17.2%  
No of shares (m)       1,530.2  
Diluted EPS (Rs)*         7.6  
P/E (times)         16.9  

What has driven performance in 2QCY11?
  • On a standalone basis, Ambuja Cementsí net sales rose by 6.1% YoY during the quarter ended June 2011. The company witnessed a 2.2% YoY decline in sales volume to 5.29 m tonnes during the quarter. However, improvement in cement realisations helped the company register a positive topline growth.

  • However, the operating profit dropped by 3.4% YoY on the back of an increase in operating expenses. Raw material, power and fuel costs, which accounted for 28% of net sales in 2QCY10, rose to 33% in 2QCY11. There was a steep rise in coal prices along with higher grid power tariff.

  • Interest charges were higher during the quarter. As a result, net profits declined by 11.2% YoY during the period. The net profit margin declined from 19.1% in 2QCY10 to 16% in 2QCY11.

What to expect?
The cement industry is still reeling under the throes of overcapacity. Slowdown in construction and infrastructure spending has further played spoilsport. Moreover, rising energy costs will continue to pose pressure on the profit margins of the cement players. Hence, in the short to medium term, the scenario for the cement industry seems quite bleak.

At the current price of Rs 129, the stock of Ambuja Cements is trading at an EV/tonne of almost Rs 5,700 based on our CY13 estimates, making it expensively valued as per the replacement cost method.

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