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Ambuja Cements’ second quarter results offer no surprises

Ambuja Cements’ second quarter results offer no surprises
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First Published: Wed, Nov 02 2011. 10 41 PM IST

Updated: Wed, Nov 02 2011. 10 41 PM IST
Ambuja Cements Ltd’s earnings for the September quarter were in line with analyst estimates, and those of its peers. Revenue rose 16% year-on-year (y-o-y) to Rs 1,833.7 crore, driven by favourable market conditions. Cement despatches were 7.6% higher. This, along with higher cement prices during the quarter, saw realizations rise by around 7.3%.
In comparison with peers, Cements’ realization per tonne of cement sold in the September quarter was higher than that of its affiliate ACC Ltd, but lower than that of UltraTech Cement Ltd. UltraTech reported the highest realization during the quarter.
However, Ambuja Cements’ realization fell around 6.8% compared with the June quarter, which was sharper than ACC’s sequential decline, mainly because of the former’s lack of presence in the south Indian market, where prices have remained relatively stable over the past two quarters.
But better realization did not translate into significantly higher profitability. In fact, Ambuja Cements could not absorb the rising costs of raw material, power, fuel and freight. Operating profit was marginally higher on a y-o-y basis at Rs 319.4 crore.
The sequential performance does not paint a rosy picture, too; lower volumes and realizations resulted in a 47% decline in operating profit. As was the case with its peers, the magnitude of drop in operating margin on a sequential basis was also higher—from 27.3% in the June quarter to 17.4% in September.
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According to analysts, Ambuja Cements has been able to improve operating efficiency by increasing its clinker capacity, which reduces the need to source clinker externally. Analysts reckon that the fall in profitability may have been worse, if not for higher clinker capacity.
Towards this end, over the longer term, the company plans to set up 2.2 million tonnes of clinker capacity, which analysts reckon would be operational around 24-36 months from now.
Reported net profit at Rs 172 crore was around 12.7% higher than a year ago. But it was only half the level of the profit posted in the June quarter. Adjusting for prior-period expenses included in its results, net profit for the September quarter stands at Rs 192 crore, which is in line with analysts’ estimates.
Ambuja Cements’ shares, like those of peers, have appreciated over the last six months and outperformed the BSE benchmark Sensex, since cement prices started firming. However, analysts’ consensus is that the stock, at Rs 157, trades at expensive valuations. A report from Brics Securities Ltd says, “The stock trades at EV/tonne of $165 (around Rs 8,135 today), which is at 44% premium to replacement cost.” EV refers to enterprise value.
Given that the industry is operating at 72-75% of its capacity, cement prices may not see a huge upside in the near term. Therefore, rise in stock prices of cement firms from these levels could be limited.
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First Published: Wed, Nov 02 2011. 10 41 PM IST