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Ambuja Cements: Mixed performance! - Views on News from Equitymaster
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Ambuja Cements: Mixed performance!
Oct 19, 2007

Performance summary
  • Topline grows by 15% YoY during the quarter on the back of improved realisations.

  • EBITDA margins contract by 1.7% as operating costs grow at a faster rate compared to net sales.

  • However, net profit has grown by a decent 12% on account of lower finance charges.

  • If one excludes extraordinary items, then the net profit growth stands at 20% YoY during 3QCY07.

    Financial performance snapshot
    (Rs m) 3QCY06 3QCY07 Change 9mCY06 9mCY07 Change
    Net sales 11,310 12,999 14.9% 35,188 41,981 19.3%
    Expenditure 7,349 8,668 18.0% 22,371 26,566 18.8%
    Operating profit (EBITDA) 3,962 4,331 9.3% 12,817 15,415 20.3%
    EBITDA margin 35.0% 33.3%   36.4% 36.7%  
    Other income 294 184   400 927 132.0%
    Interest 96 (156)   335 (349)  
    Depreciation 567 584 3.0% 1,697 1,765 4.0%
    Profit before tax/(loss) 3,593 4,088 13.8% 11,184 14,927 33.5%
    Extraordinary item - (209)   344 6,614  
    Tax 975 955 -2.1% 1,508 3,931 160.7%
    Net profit 2,618 2,924 11.7% 10,020 17,609 75.7%
    Net profit margin 23.1% 22.5%   28.5% 41.9%  
    No of shares (m)       1,360 153  
    Diluted EPS (Rs)*         14.1  
    P/E (times)         9.9  
    *trailing twelve month earnings

    The company has changed its name from ‘Gujarat Ambuja Cements Ltd’ to ‘Ambuja Cements Ltd’, with effect from April 05, 2007.

    What is the company’s business?
    Gujarat Ambuja, with a total consolidated capacity of 16 million tonnes (MT), is the third largest cement producer in the country. It has close to 10% of the country's total cement capacity and has presence in the western, northern and eastern regions as its principal markets. The company is also the largest exporter of cement and this helps it enhance capacity utilisation. Holcim Mauritius, an indirect wholly owned subsidiary of Holcim (Europe), over a period of time has acquired 36% stake in the company. Ambuja Cements Eastern ltd (ACEL) has been merged with Gujarat Ambuja Cements Ltd w.e.f. Jan 1, 2006.

    What has driven performance in 3QCY07?
    Realisations aid topline growth: While volume sales increased by almost 6% YoY, the 15% YoY growth in topline was more a consequence of the firm cement realisations (grew by almost 9% YoY). The company has achieved growth despite lower production and despatches during the August month this year on account of severe flooding at Ambujanagar plant in Gujarat. The same is the case for the nine-month period performance. The 19% YoY growth in topline is more a function of improved realisations rather than volume growth.

    Higher costs dent margins: Despite enjoying pricing power and growth in volumes, the company’s operating margins contracted by 1.7% YoY during 3QCY07 on account of rising costs of operation. The company’s cost of operation has increased by 10% YoY basis on cost per tonne basis as opposed to the 18% growth in absolute terms. This has been the fall out of higher raw material consumption for blending, rising employee costs and higher energy costs. Further, transporters increasing freight rates in light of rising liquid fuel prices have led to increase in transportation costs, an important cost element in a bulky business like cement. As a percentage of sales, freight and forwarding costs have increased by 1.4% and employees cost by 0.7%. Even for the nine month ended CY07, the pressure on most of the cost heads has persisted. Though as a percentage of sales basis, the company has been able to sustain cost and improve margins marginally, on a cost per tonne basis, they have increased significantly (18% YoY).

    Cost break-up
    (as a % of sales) 3QCY06 3QCY07 9mCY06 9mCY07
    Increase/Decrease in stock in trade -0.1% -0.6% 0.0% 0.0%
    Consumption of raw material 5.8% 6.5% 6.4% 6.9%
    Staff cost 4.0% 4.7% 3.7% 3.7%
    Power and fuel 18.9% 18.5% 18.5% 16.9%
    Freight and forwarding 19.1% 20.5% 18.8% 20.3%
    Other Expenses 17.3% 17.0% 16.2% 15.6%

    Extraordinary push: The bottomline has significantly outperformed topline during 9mCY07 on account of an extraordinary income. The company, during the year, completed sale of its property situated at Kalina, Mumbai and recognised profits of approximately of Rs 3 bn. It also received a close to Rs 5 bn consideration for exercising the put option entered with Holcim for 95 m shares of Ambuja Cement India Pvt Ltd, its associate company. This has led to the 76% YoY growth in net profits for the 9mth period ended September 2007, however, if one excludes extraordinary income, then the net profits grows by only 14% YoY. During 3QCY07, the company has recognised a provision of Rs 210 m for diminution in value of investment in subsidiary Ceylon Ambuja Cements (Pvt) Ltd. This has resulted into the bottomline for the quarter growing by 12% YoY as opposed to the 20% growth without the effect of the provision.

    What to expect?
    While the merger with Ambuja Cement Eastern has provided the company with a presence in the eastern markets, Holcim’s expertise will benefit it in the long term. The company has outlined investment outlay of Rs 35 bn to increase its capacity from the current 16 MT to 22 MT by 2009 and also to increase its clinker capacity. The company has also outlined plans to step up the capacity of its captive thermal power plant at Ambujanagar in Gujarat in order to curtail costs. During the quarter, the company has commissioned a new 1 MT cement grinding unit at Roorkee in Uttaranchal. An upgradation project in the clinkerisation unit at Rabriyawas, Rajasthan was also completed, increasing the total clinker capacity from 1.6 to 2 MT.

    While we do not doubt the growth prospects we have reservations with respect to current valuations of the stock. At the current price of Rs 140, the stock is trading at an expensive valuation of over US$ 150 on the enterprise value per tonne (EV/tonne) basis as per our CY09 estimates. Since this is at the upper end of our valuation band, we advise investors to practice caution.

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