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Gujarat Ambuja: Brand benefits - Views on News from Equitymaster
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Gujarat Ambuja: Brand benefits
Oct 26, 2006

Performance summary
Gujarat Ambuja, a leading cement player in the country, has reported its first quarter ended September 2006 (July-June fiscal) results. Largely stable realisations in the domestic markets owing to increase in demand, which is in contrast to the usual trend of weak prices during monsoons, and an export presence helped the company boost its topline by 50% YoY and operating profits by 109% YoY. The company, which has been considered as one of the lowest cost producer of cement in the country, has seen its operating costs rise in the past few quarters, mainly due to increase in liquid fuel prices.

Financial performance snapshot
(Rs m) 1QFY06 1QFY07 Change 1HFY06 1HFY07 Change
Net sales 6,549 9,841 50.30% 13,754 21,184 54.00%
Expenditure 4,846 6,285 29.70% 9,832 13,194 34.20%
Operating profit (EBITDA) 1,703 3,556 108.90% 3,921 7,990 103.70%
EBITDA margin 26.00% 36.10% 28.50% 37.70% 32.30%
Other income 13.4 258 1825.40% 145 158 9.40%
Interest 215.9 85.1 -60.60% 442 208 -53.00%
Depreciation 489.9 499.5 2.00% 956 996 4.20%
Profit before tax/(loss) 1,010 3,230 219.70% 2,668 6,944 160.30%
Tax 257.5 783 204.10% 463 1458 214.90%
Net profit 753 2,447 225.00% 2,205 5,486 148.80%
Net profit margin 11.50% 24.90% 116.30% 16.00% 25.90% 61.60%
No of shares (m) 2,704 2,719
Diluted EPS (Rs)* 6.9
P/E (times) 17.8
*trailing twelve month earnings

What is the company’s business?
Gujarat Ambuja, with a total consolidated capacity of 14 million tonnes (MT), is the third largest cement producer in the country. It has close to 9% of the country's total cement capacity and has the western and northern 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), acquired a 14.8% stake from the promoters of the company.

What has driven performance in 1QFY07?
Realisations drive topline: The average cement price during the quarter stood at Rs 204 per 50 kg bag leading to a very impressive 29% YoY growth in realisations for the company. Further, during the quarter, Gujarat Ambuja’s production and despatches grew by 9% YoY and 10% YoY respectively, largely in line with the industry growth. The company has achieved growth despite lower production and despatches during the August month this year on account of heavy monsoon and floods in Gujarat, Rajasthan and Maharashtra. The company has also benefited from a 30% YoY in export prices during 1QFY07.

Costs needs to control: Led by a sharp increase in cement prices, the company's operating margins have expanded by 10.1% during 1QFY07. However, costs on per tonne basis have increased significantly on account of rising input costs, such as coal and petroleum products. Fixed costs like power and fuel and employee expenses declined as a percent of sales. The company has also reported an increase in freight costs during the quarter, and this has been fallout of transporters increasing freight rates in light of rising liquid fuel prices.

Cost break up (% of sales) 1QFY06 1QFY07
Increase/Decreae in stock 0.02% 0.61%
Consumption of raw material 5.26% 5.01%
Staff cost 4.35% 4.15%
Power and fuel 26.40% 19.43%
Freight and forwarding 17.52% 19.23%
Other Expenses 20.50% 16.66%
Total Expenses 74.01% 63.86%

Trading, Net profit -all up: As mentioned earlier, better prices and favourable demand-supply scenario has resulted in expansion in margins during 1QFY07. This, when combined with higher other income and lower interest expenses, has helped Gujarat Ambuja rake in a superior bottomline growth during 1QFY07.

What to expect?
At the current price of Rs 122, the stock is trading at a price to earnings multiple of 17.8 times its trailing twelve month earnings. While the merger with Ambuja Cement Eastern will provide the company with a presence in the Eastern markets and synergies with Holcim will benefit it in the long term, we believe that growth is already factored in the stock price and, thus, would recommend investors to practice caution.

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