Why investors needn’t get excited about Ambuja’s improved margins

Expectations from Ambuja Cements Ltd were running low, but its results for the June quarter were even more disappointing. Stand-alone net profit declined 17.5% year-on-year (y-o-y) to ₹412 crore, while revenues dipped by 1.3% to ₹2,978 crore.

As Ambuja operates at optimum capacity, a decline in volumes was anticipated. Indeed, cement sales volumes in the June quarter were down 9% y-o-y to 5.82 million tonnes. But the drop in volumes was steeper than anticipated.

While Ambuja shares were trading in the green ahead of the results announcement, they fell after the results were announced. A positive in the results is that realizations have improved, thanks to a slew of price hikes during the quarter in the company’s key markets of north and west India.

ACC Ltd, which has pan-India presence, also posted healthy realization growth in the June quarter. This improvement was on the cards.

Analysts added that Ambuja’s realizations also seem to have benefited from its recently launched premium-product range.

Better realizations, coupled with easing freight costs, aided margins. Operating margins increased more than 200 basis points y-o-y to 24%. Freight cost declined nearly 16% y-o-y in the June quarter. “Fuel costs were higher in the quarter and were partly alleviated by freight and forwarding costs on account of network optimization, re-negotiation of contracts and a change in mode mix,” the company said in a release.

But now that cement price rises have been rolled back across India following restrained demand, realizations are unlikely to persist at these levels. Besides, the company’s capacity constraints would take a few more quarters to ease, as the expansions come online. Hence, analysts see limited potential in the stock from the current levels.

As far as valuations go, the stock is trading at a one-year-forward EV/Ebitda multiple of around 18 times, lower than some of its all-India peers. EV stands for enterprise value and Ebitda is short for earnings before interest, tax, depreciation and amortization.

So far this year, shares of Ambuja have fallen around 5%. On the other hand, competitors have registered gains during the same period.

In short, the fact that the June quarter performance was driven by better realizations may not be something to get excited about. For the stock to turn appealing, Ambuja’s performance has to improve in terms of market share gains, which are currently capped due to capacity-related challenges. Unless that happens, even improving demand may not translate into higher volume growth in the near term.