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Ambuja Cem: Higher realizations drive profits
Nov 4, 2014

Ambuja Cements has announced its results for the third quarter of the calendar year 2014. During the quarter, the company's sales and net profit increased by 9.2% YoY and 44% YoY respectively. Here is our analysis of the results:

Performance summary
  • On a standalone basis, net sales increased by 9.2% during the quarter driven by better cement realisations.
  • Operating profits increased by 49.6% YoY; operating margins expanded from 12.6% in 3QCY13 to 17.3% in 3QCY14.
  • Net profit increased by 44% YoY; net profit margin expanded from 8.3% in 3QCY13 to 10.9% in 3QCY14.
  • During the nine-month period ended September 2014, sales and profit increased by 9.3% YoY and 19.4% YoY respectively.

Standalone financial performance snapshot
(Rs m) 3QCY13 3QCY14 Change 9MCY13 9MCY14 Change
Net sales 20,029 21,876 9.2% 68,895 75,317 9.3%
Expenditure 17,496 18,087 3.4% 56,071 60,031 7.1%
Operating profit (EBITDA) 2,533 3,789 49.6% 12,824 15,286 19.2%
EBITDA margin 12.6% 17.3%   18.6% 20.3%  
Other income 961 1,030 7.2% 3668 3,982 8.5%
Depreciation 1,246 1,302 4.5% 3,673 3,740 1.8%
Interest 178 179 0.2% 482 542 12.6%
Profit before tax & exceptional items 2,070 3,339 61.3% 12,338 14,986 21.5%
Exceptional gain/ (loss) 248  -   248 -  
Profit before tax 2,318 3,339 44.1% 12,586 14,986 19.1%
Tax 658 949 44.1% 2,805 3,308 17.9%
Effective tax rate 28.4% 28.4%   22.3% 22.1%  
Profit after tax 1,660 2,391 44.0% 9,781 11,678 19.4%
PAT margin 8.3% 10.9%   14.2% 15.5%  
No of shares (m)       1,544.9 1,548.5  
Diluted EPS (Rs)*         9.6  
P/E (times)         23.6  
*trailing twelve month earnings

What has driven performance in 3QCY14?
  • On a standalone basis, Ambuja Cements' net sales increased by 9.2% YoY during the quarter ended September 2014. Cement sales volumes growth was almost flat at 4.67 million tonnes during 3QCY14 as against 4.72 million in 3QCY13. The growth in the topline was driven by improvement in cement realisations.

  • On the cost front, raw material costs declined sharply by 3.8% YoY (as a percentage of net sales). Other expenses too declined by 1.1% (as a percentage of net sales). As a result, operating profit margins expanded from 12.6% in 3QCY13 to 17.3% in 3QCY14.

    Operating cost break-up
    (Rs m) 3QCY13 3QCY14 Change
    Raw materials consumed 1,531 1,767  
    Purchase of stock-in-trade - 191  
    Change in inventory 596  (471)  
    Total raw materials cost 2,127 1,487 -30.1%
    % of Net sales 10.6% 6.8%  
    Employee expenses 1,300 1,424 9.6%
     % of Net sales 6.5% 6.5%  
    Power & fuel expenses 4,568 5,098 11.6%
    % of Net sales 22.8% 23.3%  
    Freight & forwarding expenses 5,083 5,483 7.9%
    % of Net sales 25.4% 25.1%  
    Other expenses 4,419 4,594 4.0%
    % of Net sales 22.1% 21.0%  
    Total operating expenditure 17,496  18,087 3.4%
    % of Net sales 87.4% 82.7%  

  • At the bottomline level, net profit rose almost in line with the growth in operating profit. Net profit margins expanded from 8.3% in 3QCY13 to 10.9% in 3QCY14.
What to expect?

During the nine-month period ended September 2014, Ambuja topline growth has been driven mainly by improved cement realizations. Growth in sales volume has been tepid at 2.9% YoY for the nine-month period. The downward trend in prices of global commodities, particularly crude oil, are set to give a strong tailwind to the Indian economy given India's heavy dependence on crude oil imports. Lower oil prices may have a multiplier effect on the overall economy. If inflation levels ease to more sustainable levels and provide the central bank with the room to cut interest rates, it will give the much-needed boost to revive economic growth in the country. This will bode well for cement players like Ambuja Cements since cement demand broadly follows the macroeconomic trends. Moreover, lower fuel prices will result in lower logistic expenses and may improve profit margins of cement companies. Lastly, the new government's focus on housing and infrastructure development should augur well for the cement sector in the coming times. As such, the long term prospects of the cement sector seem positive.

At the current prices of Rs 226, the stock is trading at 23.6 times its trailing twelve month standalone earnings. In our latest StockSelect recommendation report dated 30 October 2014, we have recommended a BUY on Ambuja Cements with a target price of Rs 288 from a 2-3 year perspective. We reiterate our BUY view on the stock.

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