Ambuja Cements: Over-supply concerns

At an enterprise value of about $120 a tonne based on estimated 2010 numbers, the stock is not cheap.

Ambuja Cements’ performance for the December 2009 quarter was slightly lower than analysts’ expectations. As the company has not provided its quarterly results separately, the same were derived from the full-year results. Backed by a 6.3 per cent rise in volume at 4.9 million tonnes (mt) and marginally higher realisations (up 2 per cent), the company’s December quarter net sales were up 9 per cent to Rs 1,771 crore on a year-on-year basis.

Ambuja’s raw material costs increased 40 per cent as it outsourced a higher amount of clinker due to unavailability of in-house capacity. But, with its new clinker capacities of about 4.5 mt coming onstream in the quarter (full commissioning by March 2010), expect Ambuja’s raw material costs to decline in the coming quarters. Positively, even as all other costs increased at a faster rate as compared to sales, the company’s power and fuel costs fell 20 per cent, which analysts say is consequent to use of cheaper fuel (optimal fuel mix) and commissioning of power generation capacity.

 

Since power accounts for 28-33 per cent of the total costs, the decline in power prices offset the sharp increase in input costs. Thus, at the operating profit level, Ambuja’s margins inched up 40 basis points year-on-year to 24.2 per cent. New capacities led to higher depreciation charges, which along with a spurt of 41 per cent in tax, resulted in net profit declining 3.5 per cent to Rs 241 crore for the quarter.

On a sequential basis, while volumes were higher by 19 per cent, an 8 per cent decline in cement realisations restricted net sales growth to 9.9 per cent. And, with total expenditure up 13 per cent, operating profits margins slipped 300 basis points; net profit was lower by 24 per cent.

In 2010, new clinker capacities should help lower costs and provide some cushion to profit margins, whereas higher overall capacities (including grinding and power) should help the company sustain revenues. Analysts, however, expect the company’s operating profit margins to decline as they expect cement realisations to fall on the back of an expected over-supply situation for the industry.

Hence, they expect Ambuja’s net profits to be lower in 2010. At Rs 103.75, up 3 per cent post the results, the stock is trading at an enterprise value of about $120 a tonne based on estimated 2010 numbers, which most analysts say is not cheap.