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Ambuja Cem: Profitability nosedives - Views on News from Equitymaster
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Ambuja Cem: Profitability nosedives
Oct 24, 2013

Ambuja Cements has announced its results for the third quarter of the calendar year 2013 (3QCY13). During the quarter, the company's sales declined by 7.4% YoY while net profits dropped by 45.4% YoY. Here is our analysis of the results:

Performance summary
  • On a standalone basis, net sales declined by 7.4% during the quarter owing to lower cement realisations.
  • Operating profits dipped by 50.6% YoY; operating margins declined from 23.9% in 3QCY12 to 12.7% in 3QCY13.
  • While finance costs increased by 7.7% YoY, depreciation charges declined by 9.3% YoY.
  • Sales of residential flats resulted in exceptional gains of Rs 248.2 m.
  • Owing to sluggish sales and weak operating performance, net profits declined by 45.4% YoY. Net margins dipped from 14% in 3QCY12 to 8.3% in 3QCY13.

Standalone financial performance snapshot
(Rs m) 3QCY12 3QCY13 Change 9MCY12 9MCY13 Change
Net sales 21,645 20,049 -7.4% 73,616 68,955 -6.3%
Expenditure 16,471 17,496 6.2% 53,722 56,072 4.4%
Operating profit (EBITDA) 5,174 2,554 -50.6% 19,894 12,883 -35.2%
EBITDA margin 23.9% 12.7%   27.0% 18.7%  
Other income 939 940 0.1% 2942 3,609 22.6%
Depreciation  1,373  1,246 -9.3% 3,797 3,673 -3.3%
Interest 166 178 7.7% 514 482 -6.3%
Profit before tax & exceptional items 4,575 2,070 -54.8% 18,526 12,338 -33.4%
Exceptional gain/ (loss) - 248   (2,791)  248  
Profit before tax  4,575  2,318 -49.3% 15,734 12,586 -20.0%
Tax  1,535 658 -57.1% 4,883 2,805 -42.6%
Effective tax rate 33.6% 28.4%   31.0% 22.3%  
Net profit 3,040 1,660 -45.4% 10,851 9,781 -9.9%
Net profit margin 14.0% 8.3%   14.7% 14.2%  
No of shares (m)       1540.0 1544.9  
Diluted EPS (Rs)*         7.7  
P/E (times)         25.2  
*trailing twelve month earnings

What has driven performance in 3QCY13?
  • On a standalone basis, Ambuja Cements' net sales declined by 7.4% YoY during the quarter ended September 2013. The company reported sales volumes of 4.89 m tonnes, marginally higher by 2.1% YoY (4.79 m tonnes in 3QCY12). A significant decline in realisations resulted in topline de-growth.

  • On the cost front, all major cost heads barring power & fuel costs witnessed significant pressure. While power & fuel costs declined by 3.1% YoY (as a percentage of net sales), raw material costs (including changes in inventory), freight & forwarding expenses, other expenses and employee expenses increased by 8% YoY, 2.9% YoY, 3.1% YoY and 1.2% YoY respectively (as a percentage of net sales).

    Operating cost break-up
    (Rs m) 3QCY12 3QCY13 Change
    Raw materials consumed 1,489 1,434  
    Change in inventory (1,027) 596  
    Total raw materials cost 462 2,030 339.4%
    % of Net sales 2.1% 10.1%  
    Employee expenses 1,151 1,300 13.0%
    % of Net sales 5.3% 6.5%  
    Power & fuel expenses 5,600 4,568 -18.4%
    % of Net sales 25.9% 22.8%  
    Freight & forwarding expenses 5,035 5,247 4.2%
    % of Net sales 23.3% 26.2%  
    Other expenses 4,223 4,351 3.0%
    % of Net sales 19.5% 21.7%  
    Total operating expenditure 16,471 17,496 6.2%
    % of Net sales 76.1% 87.3%  

  • Operating profits dipped by 50.6% YoY in 3QCY13. Operating profit margins declined from 23.9% in 3QCY12 to 12.7% in 3QCY13.

  • Other income remained flat during the quarter. While depreciation charges declined by 9.3% YoY, interest expenses increased by 7.7% YoY during the period.

  • Owing to the poor operating performance, profit before taxes and exceptional items plunged by 54.8% YoY.

  • The company reported an exceptional gain of Rs 248.2 m on account of sale of residential flats.

  • At the bottomline level, net profit declined by 45.4% YoY. Net margins contracted from 14% in 3QCY12 to 8.3% in 3QCY13.

  • The company has recently commissioned a bulk packing terminal of 1 million tonne capacity at Mangalore, Karnataka.

What to expect?

Weak demand growth, lower cement realisations and persistent inflationary pressures have adversely impacted the performance of Ambuja Cements during the quarter. Given that cement demand is closely linked to the growth of the overall economy, the poor economic conditions are likely to hamper cement demand growth over the medium term. At the current prices of Rs 194, the stock is trading at 25.2 times its trailing twelve month standalone earnings. Given the high valuations, we continue to maintain our 'Sell' view on the stock from a 2-year perspective.

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