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Ambuja Cem: High operating costs hurt margins
Nov 7, 2011

Ambuja Cements has announced its financial results for the third quarter (3QCY11) and nine-month period (9MCY11) ended September 2011. During the quarter, the company has reported 15% YoY and 13% YoY rise in sales and net profits. Here is our analysis of the results.

Performance summary
  • On a standalone basis, net sales increase by 15% YoY during the quarter ended September 2011.
  • Operating profits increase marginally by about 3% YoY, operating margins decline by 200 basis points.
  • Higher other income helps net profits to grow by 13% YoY during 3QCY11.
  • During 9MCY11, while sales rise by 10% YoY, net profits decline by 8% YoY.

Standalone financial performance snapshot
(Rs m) 3QCY10 3QCY11 Change 9MCY10 9MCY11 Change
Net sales 15,640 18,051 15.4% 56,017 61,854 10.4%
Expenditure 12,809 15,143 18.2% 40,928 47,004 14.8%
Operating profit (EBITDA) 2,832 2,908 2.7% 15,090 14,850 -1.6%
EBITDA margin 18.1% 16.1%   26.9% 24.0%  
Other income 495 857 72.9% 1,709 2,251 31.8%
Interest 89 138 54.3% 278 428 53.7%
Depreciation 1,018 1,079 6.0% 2786 3,214 15.3%
Exceptional gains/(losses) 0 0   201 0  
Profit before tax/(loss) 2,220 2,548 14.8% 13,935 13,461 -3.4%
Tax 699 834 19.3% 3,880 4,196 8.1%
Net profit 1,521 1,715 12.7% 10,055 9,265 -7.9%
Net profit margin 9.7% 9.5%   17.9% 15.0%  
No of shares (m)     1,525.6 1,532.6  
Diluted EPS (Rs)*         7.7  
P/E (times)         20.8  
*trailing twelve month earnings

What has driven performance in 3QCY11?
  • On a standalone basis, Ambuja Cement's net sales rose by 15.4%% YoY during the quarter ended September 2011. The company witnessed a 7.6% YoY increase in sales volume from 4.36 m tonnes in 3QCY10 to 4.69 tonnes in 3QCY11.

  • However, higher costs of raw materials, power and freight (as a percentage of net sales) weighed down on margins, taking operating margins down by 200 basis points (2%) from 18.1% in 3QCY10 to 16.1% in 3QCY11. Operating profits grew only marginally by 2.3% YoY.

  • Other income grew by 72.9% during 3QCY11. As a result, net profits rose by about 12.7% YoY. However, net margins remained subdued at 9.5% during the quarter, down 20 basis points from 9.7% in 3QCY10.

  • During 3QCY11, Ambuja Cements commissioned one cement mill of 1.1 m tonnes capacity at its unit in Bhatapara.

What to expect?
The cement industry is still in the throes of significant overcapacity and the same is expected to plague the industry for 2-3 years. At the same time, the inflationary environment coupled with difficulties in obtaining clearances for land acquisition and mining rights has led to a slowdown in construction and infrastructure spending, thus, affecting demand. Though the good monsoon would bring in some demand, the overall slowdown in the economy will have its negative effects. To further add, the significant rise in the costs of inputs, power and freight will continue to weigh on the margin front.

At the current price of Rs 161 the stock of Ambuja Cements is trading at an EV/tonne over Rs 7,300 based on our CY13 estimates, making it expensively valued as per the replacement cost method. As such, we maintain our cautious view on the stock from a 3-year perspective.

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