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The September quarter earnings performance of Ambuja Cements Ltd was marred by a spike in operating expenses as fuel and freight costs remain elevated. 

On a per tonne basis, blended cost increased by 9% sequentially and 7% year-on-year to 4,087 in Q3CY21. Analysts note that this is higher than expectations of a 3-4% rise in operating costs. Ambuja follows the calendar year as a financial year. 

Variable cost of production rose more than 10% both sequentially and annually. Higher advertising spends, packaging cost, and travel expenses translated into increased other expenses. Analysts also point out that since the company has only one-month of inventory days, so impact of spot cost of fuel is much more for Ambuja than peers

“Mirroring the sector trend, Ambuja witnessed cost headwinds, particularly in power & fuel and freight expenses. This led to a miss on Ebitda despite in line volume and unit realisation. Unit margins were down to Rs1,130/tonne. Despite the seasonal weakness, price decline was limited on account of improved revenue share of value-added products," analysts at Jefferies India Pvt Ltd said in a report. Volumes grew 9% YoY, with a small contribution of additional clinker sales.

Consequently, standalone operating margins fell steeply from 28.5% in the June quarter to 21.7% in the September quarter. There was some respite from better-than-expected growth in cement realisations, which partially offset the impact of higher operating expenses. 

Analysts note that the company’s realisations benefited from the change in market mix which was now in favour of better-priced markets of North & Central and lower sales in the east market, which is dealing with an oversupply situation. So, on a sequential basis, decline in realisation for Ambuja was lower than that of ACC Ltd and Ultratech Cement Ltd. The company’s sales mix of 40-45% in the North & Central regions inched up to near 50% during the quarter, while the East mix dipped from 25% to 20%. As far as the West & South sales mix is concerned, it was stable at 30%.

Yet, in the backdrop of the Q3 performance, a slew of brokerage firms have trimmed the company’s operating growth estimates for calendar year 2022 and 2023.

Meanwhile, during the September quarter, Ambuja started commercial production at its integrated plant at Marwar (Rajasthan) with clinker capacity of 3 million tonnes per annum (mtpa) and cement capacity of 1.8mtpa. 

“Going forward, incremental efficiencies and peaking utilisation may offset the cost inflation to some extent. But we remain wary of lower growth in the medium term due to capacity constraints. Near term growth will be managed by commissioning of the Marwar Mundwa project. While, the management has alluded to their plans of increasing the capacity to 50mtpa, execution will be the key," analysts at JM Financial Institutional Equities said in a report.

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