Gujarat Ambuja: Realisation blues - Views on News from Equitymaster

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Gujarat Ambuja: Realisation blues

Oct 29, 2002

Gujarat Ambuja, the 4th largest cement producer in the country, has announced poor September quarter results. The company has reported a 25% jump in topline but its bottomline has fallen by a considerable 64%. Operating margins have fallen drastically by nearly 1200 basis points to 19%.

(Rs m)1QFY021QFY03Change
Net Sales3,4014,34027.6%
Other Income8969-22.6%
Expenditure2,3463,51549.8%
Operating Profit (EBDIT)1,055826-21.8%
Operating Profit Margin (%)31.0%19.0%
Interest 247220-10.7%
Depreciation33543429.4%
Profit before Tax562241-57.2%
Extraordinary items00-
Tax-89-64-28.1%
Profit after Tax/(Loss)473177-62.7%
Net profit margin (%)13.9%4.1%
No. of Shares147.0147.0
Diluted Earnings per share*12.94.8
P/E Ratio32.3
(* annualised)

Cement sales registered an increase of 47%. This was mainly on account of higher volumes from the new Chandrapur plant, due to which domestic sales were up by 53% on a YoY basis. Export sales were also up significantly further adding to volumes. The topline growth has however been restricted due to a 16% fall in realisations on a YoY basis.

Cost Break-up...
Operational expenses 1QFY02 1QFY03 Change
Consumption of raw materials : 180 221 23%
Staff Cost 107 140 31%
Power & Fuel 707 984 39%
Excise Duty 408 608 49%
Freight & Forwarding 416 765 84%
Other Expenditure 569 779 37%
Total 2,346 3,515 50%

The drastic fall in the operating margins is mainly on account of poor realisations. Higher sales volumes have not been adequately complemented by realisations and hence operating expenses have risen on a faster clip compared to the topline growth. The operating expenses have gone up by 50% in the September quarter while the topline growth has been restricted to 25%. Interest expenses for the September quarter have been pruned by 11%. On the other hand, depreciation charges have risen considerably (29%) due to the new Chandrapur plant.

At Rs 155 the stock is trading at a P/E multiple of 32x its annualised 1QFY03 earnings. The stock has seen weakness in the short term due to damaging reports regarding its acquisition of stake in cement major ACC. The Securities Apellate Tribunal (SAT) has ordered SEBI to look into allegations that Gujarat Ambuja has gained management control over ACC despite the fact that it has just 14.5% stake in ACC. If the allegations are proved correct then Gujarat Ambuja will have to make an open offer for another 20% stake in ACC at the price which GACL paid to the Tata's for their stake (Rs 370 per share). At that price, Gujarat Ambuja will have to shell out nearly Rs 12 bn to complete the open offer. This is likely to put a severe pressure on Gujarat Ambuja's finances.

Though cement realisations are showing signs of improvement, weakness is likely to persist in the short term. Investors may benefit in the long run as and when realisations improve. Activity in the stock is likely to remain lacklustre in the short term.

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