Ambuja Cements: higher profits are not enough

In the December quarter, Ambuja Cements’s stand-alone net profit surged nearly 60% year-on-year to Rs175.88 crore, but net sales were down 6.7% at Rs2,197 crore


Graphic: Subrata Jana/Mint
Graphic: Subrata Jana/Mint

Ambuja Cements Ltd’s stock fell nearly 3% intraday on BSE on Tuesday and ended the trading session in the red. Investor nervousness indicates that a beat on the profit parameter is not enough to please the Street.

In the quarter ended December, the cement maker’s stand-alone net profit surged nearly 60% year-on-year to Rs175.88 crore, but net sales were down 6.7% at Rs2,197 crore. A Bloomberg poll of analysts estimated net profit and net sales at Rs156.5 crore and Rs2,219 crore, respectively.

Ambuja Cements, a pan-India company, follows a January-December fiscal year.

Cement volumes declined 8.8% year-on-year to five million tonnes in the fourth quarter as demand remained weak due to a cash crunch in the trade segment. This fall, which signals a loss of market share for Ambuja Cements, came as a disappointment.

It remains to be seen how the company addresses this. Price realizations were down sequentially, but increased on a year-on-year basis.

Secondly, on the cost front, power and fuel expenses fell year-on-year and quarter-on-quarter, but freight cost jumped sequentially. Its Ebitda (earnings before interest, tax, depreciation and amortization) margin improved by 50 basis points to 13.4%, year-on-year. A basis point is 0.01%. This time around, higher usage of petroleum coke (pet coke) has aided the overall profitability, but going ahead, operating efficiency is likely to be limited. As some analysts point out, the gap between low-cost pet coke and high-cost fuel has now narrowed to a large extent, so the benefits seen earlier will now wane.

Ambuja Cements increased usage of pet coke to 65% in the fourth quarter, up from 50% a year ago. According to a Kotak Institutional Equities report, the company’s operating cost per tonne increased 2% year-on-year to Rs3,804 in the December quarter.

The management expects cement demand to improve due to government initiatives. However, unlike some peers, it hasn’t indicated any capacity addition which, according to some analysts, is a cause for concern, apart from other factors like escalating input costs, falling market share and weaker price trends.

Most brokerage firms are cautious on the stock. According to an HDFC Securities Ltd report, Ambuja Cements will continue to lag peers in all likelihood and benefits from the merger with ACC Ltd will continue to be evasive.

On the valuations front, Ambuja Cements is trading at a one-year forward price-to-earnings multiple of 21.79 times. Though lower than peers like UltraTech Cement Ltd and Shree Cement Ltd, it is not cheap and the positives are largely factored into the valuation.

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