• OCTOBER 20, 2004

The Ambuja strength…

Performance summary
Gujarat Ambuja, one of the most cost-efficient manufacturers of cement, declared its 1QFY05 results today. Though growth numbers, as is evident from the table below, are higher at the first look, the numbers are not strictly comparable (due to the merger of a subsidiary with the company). Domestic sales of cement was higher by 9% during the quarter under review.

(Rs m)1QFY041QFY05Change
Net sales 3,781 5,994 58.5%
Expenditure 3,173 4,322 36.2%
Operating profit (EBDITA) 608 1,672 175.0%
EBDITA margin (%)16.1%27.9% 
Other income 146 122 -16.8%
Interest 195 210 7.6%
Depreciation 408 503 23.2%
Profit before tax 151 1,081 618.0%
Extraordinary income/(expense) 87 - -
Tax 89 176 96.9%
Profit after tax/(loss) 148 905 510.4%
Net profit margin (%)3.9%15.1% 
No. of shares (m) 176.4 176.4  
Diluted earnings per share (Rs)* 3.4 20.5  
Price to earnings ratio (x)  17.6  
(* annualised)   

Gujarat Ambuja, with a total capacity of 12.5 million tonnes (MT), is the third largest producer of cement in the country. It has close to 9% of the country's total cement capacity and has the western and the northern region as its principal markets. With plants that are believed to be highly efficient, Gujarat Ambuja has come to be known as the lowest cost producer of cement in the country. The company also has a 14.4% stake in ACC, the country's second largest cement producer. Besides, the company is also the largest exporter of cement and this helps it enhance capacity utilisation.

What has driven performance in 1QFY05?
Volumes gaining momentum:  It has been a slow start for the cement sector. Like in 1HFY04, cement demand grew at a relatively slower rate of 4.7% in 1HFY05 (April to September 2004). However, Gujarat Ambuja has managed to outperform the industry by a fair margin (domestic sales higher by 9%). Also adding to the momentum is the sharp rise in export volumes at around 33% (largely to the Middle East). The graph below highlights the overall despatches growth for Gujarat Ambuja since July 2003. We believe that the demand outlook for the sector continues to remain promising.

Favorable prices are a sweetener:  Not only has cement demand grown, but also the prices have strengthened, especially in the key northern and western markets. With demand likely to exceed production and no sharp rise in supply in sight for the next one year, there is an upward bias in cement prices. Unlike the last decade, the medium-term outlook for prices is more favorable. While higher prices and better capacity utilisation have enabled the company to improve operating margins, power and fuel costs have increased as a percentage of sales in 1QFY05 (table below). As per the company, the direct cost of production increased by 14% per tonne due to surge in coal and oil prices globally.

The expenditure side...
(Rs m)1QFY041QFY05Change
Raw material 278 205 -26.4%
% of sales7.4%3.4% 
Salaries 229 235 2.7%
% of sales6.1%3.9% 
Power and fuel 974 1,598 64.1%
% of sales25.7%26.7% 
Freight and handling 779 1,068 37.1%
% of sales20.6%17.8% 
Other expenditure 914 1,216 33.1%
% of sales24.2%20.3% 

What to expect?
The stock currently trades at Rs 360 implying a price to earnings multiple of 17.6 times 1QFY05 annualised earnings. While the performance of the company at the topline level is in line with our estimate, at the margin level, we have exercised caution in our estimates. This is because of the higher oil prices, which not only impact power cost, but also the freight cost. Coming back to the demand side, from a medium-term perspective, we expect demand to grow at more than 8%. Prices are also expected to be higher by more than 5% on an average. Consequently, Gujarat Ambuja is likely to continue its outperformance.

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