Ambuja Cements Limited (ACL) could not shield its profits from the rising raw material and power costs, which resulted in 868 bps y-o-y fall in EBITDA margin. However, net sales grew by 17% on the back of higher volumes.
On a sequential basis, the average realisation rate registered a decline of 2%. Owing to an expected excess supply scenario and the government’s price control policies, the realisation rates are expected to dip further.
Raw material costs doubled during the quarter, due to an increase in the prices of limestone, fly ash, and coal. This trend that is likely to persist due to the global inflationary pressures.
Moreover, ACL is forced to purchase clinker from the market at an expensive rate as it is increasing its grinding capacity faster than its clinker capacity. Going forward, this trend is likely to continue as clinker capacity addition is expected only in the middle of CY09.
Considering these factors, we expect that margins would drop significantly in CY08E. However, the clinker capacity addition is likely to stem the fall in margins for CY09E.
On the basis of DCF analysis and valuation, we conclude that the stock seems to be over valued at the current market price. Hence, we downgrade our rating from Hold to SELL.