The results of Ambuja Cements Ltd for the year ended December 2008 reflect the pressure the company is facing owing to high fuel costs. Power and fuel costs have risen by 24% for every tonne of production, and as a result operating profit per tonne fell by 17%.
Profit margin fell by as high as 7 percentage points. The company has been impacted more than ACC Ltd, which reported results on Thursday, because of its higher reliance on imported coal, prices of which soared last year.
Even the outlook for the current year is more bleak than other cement majors because of high exposure to the northern region, where additional capacity will come on stream before other parts of the country. Most parts of the country will be in an oversupply state by the January-March quarter of 2010, but additional capacities are expected in the north this year itself, points out an analyst with an institutional broker. While 38.5% of Ambuja’s domestic dispatches are to the northern region, another 13.5% of domestic sales are in the state of Gujarat, where prices get impacted depending on the dynamics in the Northern region.
Also See Bleak Outlook (Graphic)
Therefore, over half the company’s sales will face pricing pressure in the second half of this year. Indeed, the company itself points out in its press release announcing its annual results, “With a number of expansion projects in the pipeline, the cement industry is likely to experience surplus capacity, which may have some impact on pricing in the second half.”
With this backdrop, it’s interesting that shares of Ambuja Cements have risen by nearly 60% from their lows in October 2008. A substantial part of the appreciation in the stock can be attributed to the double-digit growth in volumes the industry has witnessed in the past few months. But the decent growth, which is expected to last till March, is owing to the construction activity just before the general elections.
With the real estate sector in a major slump, overall demand is expected to fall later this year. Ambuja’s valuation of about 11 times trailing earnings, in that context, is rather high. It ignores the fact that it’s a commodity play, which is at the brink of a downturn in its cycle, with excess capacity expected later in the year making things only worse for the cement industry.
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Graphics by Paras Jain / Mint