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Ambuja Cements: High input costs eat into profits - Views on News from Equitymaster
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Ambuja Cements: High input costs eat into profits
Oct 29, 2010

Ambuja Cements has announced its 3QCY10 results. The company has reported a 2.9% YoY and 52% YoY decline in sales and net profits respectively. Here is our analysis of the results:

Performance summary
  • Revenue falls by 2.9% YoY. The negative growth has come on the back of poor realisations despite a marginal 1.4% increase in volume sales.
  • During the quarter, operating costs rise 8.5%, reducing the EBITDA margin by 8.6% YoY.
  • While operating profits drop by 34%, the bottomline declines by 52% YoY.
  • Lower other income, higher depreciation and interest expense hinder growth in net profits.


Financial performance snapshot
(Rs m) 3QCY09 3QCY10 Change 9mCY09 9mCY10 Change
Net sales 16,110 15640 -2.9% 53,040 56,017 5.6%
Expenditure 11,809 12809 8.5% 38,715 40,928 5.7%
Operating profit (EBITDA) 4,301 2831 -34.2% 14,325 15,089 5.3%
EBITDA margin 26.7% 18.1%   27.0% 26.9%  
Other income 894 495 -44.6% 2,002 1,708 -14.7%
Interest 52 89 71.2% 157 278 77.1%
Depreciation 719 1018 41.6% 2,110 2,786 32.0%
Profit before tax/(loss) 4,423 2220 -49.8% 14,061 13,735 -2.3%
Extraordinary items - -   - 201  
Profit from extraordinary activities 4,423 2220 -49.8% 14,061 13,936 -0.9%
Tax 1,238 699 -43.5% 4,289 3,881 -9.5%
Net profit 3,185 1521 -52.2% 9,772 10,055 2.9%
Net profit margin 19.8% 9.7%   18.4% 17.9%  
No of shares (m)       1,523 1525.6  
Diluted EPS (Rs)*         8.2  
P/E (times)         17.5  

Performance summary
  • Ambuja Cements' revenues fell by 2.9% YoY during the quarter ended September, 2010. The overall weakness in cement demand growth was mainly due to the strong monsoon and delayed spending on infrastructure and housing projects. Domestic sales volume increased by 7.6% whereas exports fell by 32% YoY.

  • Demand in the East was relatively strong, while West saw only moderate growth, and North and Central markets remained more or less flat. Export activity continued to remain very slow.

  • Subdued demand growth coincided with significant capacity additions, putting pressure on pricing and margins. At the same time cost pressures increased as a result of lower availability of linkage coal, and higher prices for imported coal and petcoke. Operating expenditure rose by 8.5% YoY. Power and fuel costs increased 38% YoY during the quarter, partly as a result of significantly higher clinker production volumes, and partly as a result of increasing coal costs. Clinker purchases have been eliminated as the new kiln lines have rapidly stabilised. The other cost heads reported growth owing to general rise in price level and higher fuel costs.

  • Poor realisations coupled with higher depreciation (up 42% YoY) and interest costs (up 71% YoY) depressed the bottomline by 52% YoY.

What to expect?
The September quarter has been the worst quarter for the enitre cement industry in the recent down-cycle. Though Ambuja Cements' results are poor for the quarter, they are better than the rest of the industry which has been hit even harder. The post monsoon season has seen prices firming up and the demand picking up. Construction and infrastructure activity is also expected to pace up. The next couple of quarters may witness some strain due to the demand-supply mismatch but going forward surplus supply is expected to be absorbed. Further, the government's thrust on infrastructure and the revival of real estate demand are likely to support growth of the industry at around 9% over the next two to three years.

Ambuja Cements' expansion plans are progressing as per schedule. The company's cement production capacity has been scaled up to 25 MTPA. It plans to scale up its capacity to 27 MTPA by the end of the current year to maintain its market leadership.

At the current price of Rs 142, the stock is over-valued at over Rs 7,400 on an enterprise value per tonne (EV/tonne) basis as per our CY12 estimates. We advise investors to practice caution as the stock is trading way beyond the upper end of our valuation band.

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