Ambuja Cements: Awaiting triggers

No word on merger of ACC, Ambuja and Lafarge, which can lead to gains for the company

Ambuja Cements touched an all-time intra-day high of Rs 273.35 on Thursday, before closing 1.85 per cent down at Rs 264.55 over the previous close. Analysts feel the disappointment during the December quarter on profitability took its toll. The demand and realisation in north and west India remained soft during the quarter. Cement prices on a sequential basis corrected in October-November due to the festival season.

The sales volume was 4.8 million tonnes (mt), lower than analyst estimates of over five mt. Earnings before interest, taxes, depreciation and amortisation (Ebitda) per tonne were Rs 611, also lower than the expectations of Religare Institutional Research’s analyst Mihir Jhaveri of Rs 677.

Ebitda per tonne in the September 2014 quarter was Rs 788, compared with Rs 557 a year ago. Analysts at Morning Star believe Ambuja pushed more volumes at the expense of slightly lower price realisation in a seasonally softer quarter. The per-tonne personnel, raw material and power and fuel costs also surged 65 per cent, 83 per cent and 59 per cent over a year, respectively.

Sales were Rs 2,188 crore, up 8.8 per cent over a year and 8.6 per cent sequentially. Tax write-backs helped profits, which came in at Rs 329 crore, up 3.8 per cent sequentially and 37.5 per cent over a year.

The company expects demand to improve, with higher gross domestic product (GDP) growth and government’s push to the housing and infrastructure sectors. But, analysts feel demand and realisation growth might not happen soon, raising near-term concerns. There are some delays in expansions, especially in regions where Ambuja had little presence. While Ambuja commissioned its 0.8 mt per annum expansion in Rajasthan during the December quarter, the 0.8-mt expansion in the Eastern region, to be finished in 2014, is still not completed.

Emkay Global’s analyst Sanjeev Kumar Singh expects the plant to be commissioned in 2016. He also expects the 2.7-mt clinker plant and 4.5-mt grinding unit (also based in the east) to see a delay of two-three quarters, against the planned start in early 2016.

The merger of Holcim and Lafarge could add to the company's benefit. While ACC’s merger with Ambuja has already been announced and the market is factoring in this, terms for the Lafarge merger and clearance from the competition commission are awaited. Once complete, it should lead to higher synergies and cost savings for the group.

Until then, the Street will be looking at demand pick-up and better realisations as key triggers for the stock, whose target price, according to various analysts after results, stands Rs 235-295.