Ambuja Cements: Stock’s movement could be deceptive
There is a high probability that shares of Ambuja Cements will gain sharply when the stock market opens—just like it happened after ACC Ltd’s earnings
Latest News »
- Donald Trump says he’s considering both Janet Yellen, Gary Cohn for Fed chair
- New legal provisions to deal with racial attacks planned: Government
- Declaring 39 Indians abducted in Iraq dead without proof will be sin: Sushma Swaraj
- Tejaswi won’t not resign, say Lalu Prasad Yadav, puts ball in Nitish’s court
- Rajya Sabha adjourned thrice over Arun Jaitley’s remarks on adjournment notices
Ambuja Cements Ltd’s March quarter results are a beat on profit, revenue and volumes.
Shares of the cement manufacturer had slipped nearly 2% on BSE on Friday, ahead of muted March-quarter earnings expectations. But now that the pan-India company has sprung a surprise, the stock should get a boost.
There is a high probability that Ambuja Cements’ shares will gain sharply on Tuesday when the stock market reopens—just like it happened after ACC Ltd’s earnings.
However, for market participants already invested or planning to take an exposure to cement stocks, it’s advisable to avoid going by the stock’s price movement alone.
That may not reflect the true picture.
Talking about Ambuja’s earnings first, lower depreciation and amortization costs pushed stand-alone net profit up four times to Rs247 crore year-on-year (y-o-y) in the March quarter.
Cement sales volume surged 2.73% y-o-y to 6.02 million tonnes (mt) and that resulted in A revenue growth of 5.4% y-o-y.
Blended realization increased annually but declined sequentially, which, according to some analysts, was on account of a decline in cement prices across its markets in western and eastern India during the quarter.
Higher production costs, especially the surging prices of petroleum coke and imported coal, impacted operating margin that saw a sharp contraction of 320 basis points to 15.4% y-o-y. Freight costs continued to remain elevated. One basis point is one-hundredth of a percentage point.
Analysts expect operating performance to improve, backed by a recovery in realizations in the western and northern markets, where the company has a large presence.
According to a Motilal Oswal Securities Ltd report, Ambuja Cements has 76% exposure to both these regions, compared with 62% for ACC, and cement prices in the aforementioned markets are poised to see sharp to moderately high hikes.
Apart from that, the successful completion of group restructuring may help improve operating synergies.
Let’s come back to the stock’s performance.
ACC Ltd’s shares jumped 7% after it exceeded volume growth expectations and remained higher for the next few sessions, which was partly due to overall stock market euphoria.
But after that, ACC’s rally fizzled out.
Caution needs to be exercised because the same trend may be repeated with the Ambuja stock.
Valuations are another parameter that one shouldn’t go by, at least in this case.
Ambuja is trading at a one-year forward price–earnings multiple of 35 times. Though lower than peers, it’s still expensive and needs to correct because positives such as margins improvement and a strong balance sheet are largely factored in.
Also, a key worry is the company’s declining market share despite volume growth in the March quarter.
Given the increased competitive intensity, analysts are sceptical whether the company will be able to recover the lost ground.
“We are still concerned about its ability to regain its market share due to no capacity addition in sight at least till 2018,” said a Reliance Securities Ltd report.
Sharing a similar view, the Motilal Oswal Securities report added that it expects the company to underperform growth in volume going ahead.