Some cement producers are relying on volume growth to drive earnings. Some others are sincerely hoping that recent cement price hikes will sustain, and will aid realizations. But Ambuja Cements Ltd doesn’t belong to either of these camps.

In the wake of capacity constraints, Ambuja Cements’ sales volumes grew 4.4% in the December quarter compared to the year-ago period. This is much lower than other pan-India cement makers who saw 8-10% volume growth. To be sure, the company’s plan to add capacities in Rajasthan should address this concern. But new capacities are likely to be commissioned only by the end of 2020, capping sharp improvement in volumes until then.

Secondly, Ambuja Cements has no presence in South India, where cement prices have been recently raised. So, investors shouldn’t expect much on the realizations front as well. The company has a large presence in the northern and western parts of the country, and dealer channel checks indicate that prices had declined by 1-3% sequentially during the quarter in these geographies.

Cement prices are expected to remain subdued in the run-up to the general election. Consequently, analysts have cut realization growth estimates for 2019 from 4-5% to 1-1.5%. Ambuja Cements follows a January-December fiscal year.

In short, the outlook on volumes and realizations for the company is muted. So, increased focus on cost optimization is the only feasible alternative that could aid its operating performance in the near term.

As the chart above shows, Ambuja Cements’ cost per tonne has been on the rise. Even though competitors—including UltraTech Cement Ltd and Shree Cement Ltd—have seen a rise in energy and freight costs, they are better placed compared to Ambuja Cements on volumes growth. ACC Ltd has managed costs more efficiently than the above-mentioned peers.

No wonder then that the Ambuja Cements stock is the cheapest among large-cap cement companies. The stock trades at a one-year forward EV/Ebitda of 7.8 times. EV stands for enterprise value, and Ebitda is short for earnings before interest, tax, depreciation and amortization.

Not many analysts are bullish on this sector due to the prolonged absence of price recovery. Still, if one has to choose from blue-chip cement companies, then Ambuja seems to be the least preferred. 

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