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Business News/ Markets / Mark To Market/  Ambuja’s capacity constraints may be set to ease, but a new concern arises
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Ambuja’s capacity constraints may be set to ease, but a new concern arises

The dividend pay-out is estimated to lead to cash outflows of around ₹3400 crore, which is around two-thirds of the total cash on its books. This is a short-term positive and buoys investors’ sentiment

Ambuja Cement's cost control measures give a boost to its operating performancePremium
Ambuja Cement's cost control measures give a boost to its operating performance

The September quarter result of pan-India focussed Ambuja Cements Ltd was impressive on many fronts.

For starters, volumes grew 8% year-on-year (y-o-y) to 5.67 million tonnes (mt) thanks to rural demand. The Street was pencilling-in volumes to grow to 5.55mt. Operating performance was aided by reduction in fixed and operating expenses. Ambuja’s Ebitda per tonne of 1200 is at a decadal high in a seasonally weak September quarter, said brokerage house Motilal Oswal Financial Services Ltd. Ebitda is short for earnings before interest, tax, depreciation and amortisation.

But what caught investors’ attention were two other developments.

Ambuja declared a record dividend of Rs17 per share in the September quarter. This is much higher than the Rs3 a share dividend the company usually declares every year. The dividend pay-out is estimated to lead to cash outflows of around 3400 crore, which is around two-thirds of the total cash on its books. This is a short-term positive and buoys investors’ sentiment towards the company post the recent management change. However, analysts are hoping that this is just a one-time event. If not, then cash flows might get strained impacting the company’s much-need expansion plans.

“If such huge cash outflow through dividend is repeated, it may show uncertainty on the future growth outlook," analysts at Dolat Capital Market Pvt. Ltd said in a report on 22 October. Ambuja follows the calendar year as the financial year.

Meanwhile, Ambuja said its clinker and cement plants in Rajasthan are scheduled to be commissioned in June quarter of calendar year 2021. The commissioning is delayed by around six months due to the pandemic. But investors can heave a sigh of relief as new capacity would boost volumes in the North and West markets.

It should be noted that market share loss due to its capacity overhang was a key concern for its investors. Ambuja is estimated to have lost over 200 basis points market share at an all-India level over the past 10 years. One basis point is one hundredth of a percentage point. Analysts expect volumes to see a compounded annual growth rate of around 10% in the next two years. However, to keep their market share growing, more capacity additions will be required, analysts said.

While Q2 earnings were impressive and the huge divided came as a surprise, Ambuja shares still fell over 2%, reflecting the above concerns.

On the valuations front, the stock is trading at a one-year forward EV/Ebitda of around 7 times. EV is short for enterprise value. It is the cheapest stock among pan-India peers ACC Ltd, Ultratech Cement Ltd and Shree Cement Ltd. Shree Cement Ltd is the most expensive listed Indian cement stock trading at a valuation multiple of around 17 times.

Now that issues relating to capacity growth have been addressed to some extent, valuations could improve, analysts said.

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Published: 23 Oct 2020, 09:57 AM IST
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