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Ambuja Cements: higher realizations save the day, but unlikely to sustain

LiveMint logoLiveMint 25-07-2017 Harsha Jethmalani

Like other cement companies, surging input costs have weighed on Ambuja Cements Ltd’s operating margin too. In the June quarter, while power and fuel costs increased 17% year-on-year, freight expenses jumped 12% annually. As a result, the company’s Ebitda margin narrowed by more than 100 basis points year-on-year to nearly 21%. Ebitda stands for earnings before interest, taxes, depreciation and amortization. A basis point is one-hundredth of a percentage point.

Some analysts feared a sharper erosion in margins, but had it not been for better-than-anticipated realizations, the margin picture for Ambuja Cements would have been dismal.

Average realization improved by 6% year-on-year and 11% sequentially mainly aided by a substantial price recovery in the western region, where the company sells more than 40% of its total production, said analysts. In the western region, prices remained on a better footing during the quarter in the state of Gujarat where demand was comparatively stronger, led by government spending, they added.

An improvement in average realizations also aided the pan-India cement maker to post a stand-alone revenue growth of 8% at Rs3,316.21 crore, exceeding Bloomberg analysts’ estimate of Rs2,672.2 crore. Though net profit of Rs392.2 crore in the June quarter was higher than the Street’s expectations, it declined 13% year-on-year.

Meanwhile, cement volumes grew 5% year-on-year to 6.14 million tonnes. “Our new investment in concrete laboratories, technical services and new products is paying off,” said the company.

Though Ambuja Cements’ earnings have surprised on most parameters, this kind of performance is unlikely to sustain in the coming quarters simply because of pricing pressure and elevated input costs, cautioned analysts.

As a recent dealer channel check by HDFC Securities (Institutional Research) showed, cement prices declined 3.7% month-on-month in July in western India. This is the steepest fall compared to other parts of the country. “The west has been plagued with low demand this month, with monsoons and GST (goods and services tax) implementation. Demand in Gujarat has also been affected by a government strike which has caused deterioration in non-trade revenues. With RERA also in force and aggregates shortages, demand in Pune suffered,” the report added. RERA is short for Real Estate (Regulation and Development) Act, 2016.

Thus, a further correction in cement prices in this region cannot be ruled out.

Meanwhile, the Ambuja Cements stock surged 1.5% intraday on BSE on Monday ahead of the June quarter earnings announcement. It closed the day at Rs267.80, up 0.94%.

On the valuation front, the stock is trading at a one-year forward price-to-earnings multiple of 27 times. This is lower than peers but not cheap, given the aforementioned concerns.

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