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Ambuja Cem: Higher realisations & better margins - Views on News from Equitymaster

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Ambuja Cem: Higher realisations & better margins
Oct 19, 2012

Ambuja Cements has announced its results for the third quarter of the calendar year 2012 (3QCY12). During the quarter, the company's sales and net profits reported a rise of 20% YoY and 77% YoY respectively. Here is our analysis of the results:

Performance summary
  • On a standalone basis, net sales increase by 20% YoY during the quarter driven by higher realisations.
  • Operating profits surge by 78% YoY as operating margins expand by 7.7%.
  • Depreciation charges increase by 27% YoY, while interest costs go up by 20% YoY.
  • Higher cement realisation coupled with strong operating performance results in 77% YoY rise in net profits. Net margins improve from 9.5% in 3QCY11 to 14% in 3QCY12.

Standalone financial performance snapshot
(Rs m) 3QCY11 3QCY12 Change 9MCY11 9MCY12 Change
Net sales 18,061 21,684 20.1% 61,968 73,696 18.9%
Expenditure 15,162 16,533 9.0% 47,046 53,867 14.5%
Operating profit (EBITDA) 2,899 5,151 77.7% 14,922 19,829 32.9%
EBITDA margin 16.1% 23.8%   24.1% 26.9%  
Other income 866 963 11.1% 2180 3007 38.0%
Depreciation 1,079 1,373 27.3% 3,214 3,797 18.2%
Interest 138 166 20.0% 428 514 20.2%
Profit before tax & exceptional items 2,548 4,575 79.5% 13,461 18,526 37.6%
Exceptional gain/ (loss) - -   - (2,791)  
Tax 834 1,535 84.1% 4,196 4,883 16.4%
Net profit 1,715 3,040 77.3% 9,265 10,851 17.1%
Net profit margin 9.5% 14.0%   15.0% 14.7%  
No of shares (m)       1532.6 1540.0  
Diluted EPS (Rs)*         9.0  
P/E (times)         22.9  
*trailing twelve month earnings

What has driven performance in 3QCY12?
  • On a standalone basis, Ambuja Cements' net sales rose by 20.1% YoY during the quarter ended September 2012. Cement sales volumes remained flat as despatches rose by a meagre 1.3% to 4.7 million tonnes (mt) in 3QCY12. As such, the growth in the topline is attributable to better cement realisations.

  • On the cost front, most major cost heads witnessed some moderation. Cost of raw materials and power & fuel declined by 5.9% YoY and 1.5% YoY respectively (as a percentage of net sales). As a result, operating profits grew by 77.7% YoY. Operating margins improved from 16.1% in 3QCY11 to 23.8% in 3QCY12.

  • Other income rose by 11.1% YoY during the quarter. On the other hand, interest costs and depreciation charges were also higher by 20% YoY and 27.3% YoY respectively, during the period. During 1QCY12, Ambuja Cements had retrospectively changed its depreciation method on fixed assets pertaining to Captive Power Plants from the 'Straight Line' method to 'Written Down Value' method. As per the company, this change gives a more suitable presentation and gives a systematic basis of depreciation charge. As a result, there was an additional depreciation charge of Rs 103.3 m during the current quarter and Rs 3,092.8 m for the nine month period ending September 2012. If not for the change in depreciation method, the net profit would have been higher by Rs. 69.8 m and Rs 2,089.3 m for the quarter and nine month period ending September 2012 respectively.

  • At the bottomline level, net profits rose by 77.3% YoY, in line with the growth in operating profits. Net margins improved from 9.5% in 3QCY11 to 14% in 3QCY12.

  • During the quarter, Ambuja Cements has commissioned one pre-grinder with a capacity of 0.6 mt at its unit at Bhatapara in Chhattisgarh.

What to expect?
While Ambuja Cements reported a meagre volume growth, better cement prices and moderation in operating costs boosted the company's bottomline on a year-on-year basis. The slowdown over the short term, notwithstanding, we expect cement demand to grow at about 8% over the next few years.

At the current prices of Rs 207 the stock is trading at 22.9 times its trailing twelve month standalone earnings. Given the high valuations, we maintain our 'Sell' view on the stock from a 2-3 year perspective.

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