Home >Markets >Mark To Market >Ambuja beats profit estimates by a mile, but investors want more

A continued focus on cost savings has enhanced the earnings performance of Ambuja Cements Ltd yet again. The company’s standalone Ebitda at 977 crore in the March quarter was 33% ahead of the consensus estimate of 740 crore. Ebitda is short for earnings before interest, tax, depreciation and amortization.

At 27.3%, the Ebitda margin improved more than 500 basis points (bps) compared to the same quarter last year. One basis point is one-hundredth of a percentage point.

Ambuja’s cost-saving initiatives such as the ‘I-CAN’ project are helping. These include measures such as renegotiation of warehouse rents and increased direct dispatches of sales.

Investors would reckon that the company has signed a master supply agreement (MSA) with ACC Ltd to boost cost efficiencies. Analysts at Kotak Institutional Equities point out that this MSA has resulted in savings of around 250 crore in calendar year 2020 or 5-6% of profit before tax for Ambuja, which follows the calendar year.

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Satish Kumar/Mint

However, this massive Ebitda beat didn’t rub off on the stock. Reacting to its earnings on Friday, shares of Ambuja ended Friday’s session down 1.5% at 309 on the National Stock Exchange.

“While the earnings momentum for Ambuja Cement looks strong, its volume growth will lag that of industry leaders despite capacity expansion," said analysts at Nirmal Bang Securities Ltd.

Ambuja’s volumes grew 26% year-on-year (y-o-y) aided by a low base to 7.2 million tonnes, which was in line with the Street’s estimates. However, Ambuja managed to outperform ACC Ltd, which reported a 21% y-o-y volume growth.

The company’s management maintained its guidance for the commissioning of 3 million tonnes per annum (mtpa) clinker and 1.8mtpa grinding capacities in Marwar-Mundwa by 3QCY21. The company has shared its medium-term plan to reach 50mtpa capacity, but details on timelines are awaited.

These capacities are expected to result in volume compound annual growth rate (CAGR) of 11% over CY20-23, said analysts at Motilal Oswal Financial Services Ltd.

“However, growth visibility remains weak beyond CY22 as no expansion has been announced," said their report.

The company’s lower valuations and stock returns do reflect this concern. Bloomberg data shows that Ambuja is trading at one-year forward enterprise value (EV)/Ebitda of 9 times. Competitors Shree Cement Ltd and UltraTech Cement Ltd are trading at valuation multiples of 21 times and 16 times, respectively.

“Considering that peers are aggressively expanding, we don’t see this gap in valuation narrowing unless Ambuja Cements steps up on its expansions. Stock returns would also lag," said an analyst with a domestic brokerage house requesting anonymity.

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