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Gujarat Ambuja: Just an aberration! - Views on News from Equitymaster
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Gujarat Ambuja: Just an aberration!
Oct 19, 2005

Performance summary
Gujarat Ambuja, a leading cement player in the country, has reported its first quarter ending September 2005 (July-June fiscal) results. The company has managed to grow its consolidated bottomline, aided largely by the impact of share of profits of associates, without which the bottomline would have been lower by 27% YoY. The topline has witnessed a fall of 4% during the quarter. Margins continue to remain under pressure.

Consolidated* performance snapshot…
(Rs m) 1QFY05 1QFY06 Change
Net Sales 7,067 6,774 -4.1%
Expenditure 5,173 5,060 -2.2%
Operating Profit (EBDITA) 1,894 1,714 -9.5%
EBITDA margin (%) 26.8% 25.3%  
Other income 235 9 -96.4%
Interest 229 220 -3.9%
Depreciation 607 495 -18.3%
Profit before tax 1,292 1,007 -22.1%
Share of Profits of Associates - 340  
Tax 204 265 30.3%
Profit after Tax/(Loss) before minority interest 1,089 1,082 -0.7%
Minority interest 79 1  
Profit after Tax/(Loss) after minority interest 1,010 1,081 7.0%
Net profit margin (%) 14.3% 16.0%  
No. of Shares (m) 179 1,352  
Diluted earnings per share* 22.5 3.2  
Price to earnings ratio (x)   20.3  
(* annualised)      

* 1QFY06 consolidated numbers are not strictly comparable to the corresponding quarter in the previous year owing to the fact that the results for the current quarter do not include results of Ambuja Cement India Ltd (ACIL) and its subsidiaries Ambuja Cement Eastern Ltd and Kakinada Cements Ltd., which have ceased to be subsidiaries of the Company. ACIL has since become an Associate of the company and the share of profit of Associate has been recognised.

India’s most cost-efficient cement producer
Gujarat Ambuja, with a total consolidated capacity of 13.9 million tonnes (MT), is the third largest producer of cement in the country. It has close to 9% of the country's total cement capacity and has the western and the northern region as its principal markets. With plants that are believed to be highly efficient, Gujarat Ambuja has come to be known as amongst the lowest cost producer of cement in the country. Besides, the company is also the largest exporter of cement and this helps it enhance capacity utilisation.

What has driven performance in 1QFY06?
Topline takes a dip: Heavy rains and floods in Gujarat and Maharashtra in the month of July and August and an 8-days strike in Himachal Pradesh during September 2005 took its toll on the topline of the company. During the quarter, the cement despatches of the company (consolidated) were lower by about 3% YoY. This is reflected in the 4% YoY dip in bottomline during the quarter. Largely stable realisations in the domestic markets owing to robust demand, which is in contrast to the usual trend of weak prices during monsoons, and an export presence where realisations continue to remain firm, helped the company protect its topline to a certain extent. It must be noted that the company exports nearly 15% of its production, which in turn forms about 50% of India’s total cement exports.

Cost break-up (% of net sales)
  1QFY05 1QFY06
Inc/Dec in stock in trade -2.8% 0.4%
Raw material consumed 4.2% 5.1%
Staff costs 4.3% 4.4%
Power & Fuel 25.8% 25.6%
Freight & Forwarding 18.6% 18.4%
Other expenditure 23.0% 20.8%
Total expenses 73.2% 74.7%

Operating margins continue to slide: On a YoY basis, the operating margins for the company during 1QFY06 are lower by 150 basis points. This is because the fall in operating costs was proportionately lower in comparison to the topline. Nonetheless, though in absolute sense, the company has lowered YoY costs across operating heads, high oil prices continue to remain a challenge.

Net profits up: Despite the decline in operating profits and almost negligible other income (down 96% YoY), the bottomline during the quarter registered a growth of 7% YoY. This could be attributed to the 18% fall in depreciation expenses and an addition of Rs 340 m pertaining to Gujarat Ambuja’s share of profits of associates. Near absence of minority interest provisioning also helped matters.

What to expect?
At Rs 65, the stock is trading a price to earnings multiple of 13.2 times our estimated FY08 earnings and an EV/ton of US$ 93. The company commands a premium in terms of valuations as compared to its peers owing to presence in lucrative regions like West and the North and also due to its cost efficiencies. With cement demand in the country slated to grow at about 8%-10% over the next couple of years and absence of any significant cement capacity coming on stream, we expect the cement demand-supply situation in the country to continue to improve, which augurs well for cement prices. Also, considering that Gujarat Ambuja has an export presence where realisations have remained firm, the company could remain insulated to a certain extent from any volatility in domestic cement prices.

We had recommended a BUY on the stock at Rs 56 in April 2005 with a target price of Rs 72, which was achieved last month. At the current juncture, we believe that investors with a medium to long-term investment horizon could continue to hold the stock.

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