Ambuja Cements disappoints in Q1 results; stock may remain range-bound

Amid rising costs and limited volume growth outlook, realisation improvement is crucial for profit

Ambuja Cements’ performance for the quarter ended March 2018 (Q1) disappointed the street with net profit at Rs 2.72 billion, up 11.3 per cent year-on-year, falling short of the Bloomberg consensus estimate of Rs 2.97 billion. Its stock, thus, closed 1.5 per cent lower, at Rs 237, in Friday’s trade. Analysts observe, given the subdued outlook, the stock may remain range-bound in the near-term.

The March quarter, the first quarter for Ambuja as it follows January-December financial year, was affected by rising costs and lower-than-expected volumes. Sales volumes also grew by just 3.3 per cent yoy to 6.22 million tonne (Mt) in March quarter, and were lower than the 8-32 per cent growth clocked by its peers such as Shree Cement, UltraTech, and its subsidiary, ACC, in the March quarter. Motilal Oswal Securities had expected volumes to rise by 5 per cent, while Emkay Global was expecting a 6 per cent growth.

Ambuja also saw a significant rise in costs. Higher petroleum coke (pet coke), coal and diesel prices continue to hurt cement players and Ambuja Cements was no exception. It saw an 8-14 per cent yoy increase in per-tonne logistics and fuel costs in the March quarter. Raw material costs, led by rising gypsum and fly-ash costs, too, surged 28 per cent yoy. On sequential basis, too the logistic costs were up 6 per cent, even as sales volume declined. However, employee costs were flat on a year-on-year basis, and lent some support.

Value-added products also helped Ambuja’s performance with premium brands such as Compocem and Roof Special, reporting improved realisations and sales growth. Thus, net sales of Rs 27.63 billion, up 9.22 per cent yoy, came almost in line with expectations, helped by a seven per cent increase in net realisations.

Ambuja’s reported numbers however, indicate that its Ebitda (earnings before interest, tax, depreciation and amortisation) is up 29 per cent at Rs 5.07 billion versus Rs 3.94 billion in the year-ago quarter. “Our focus is on reducing costs, improving productivity, and increasing capacity utilisation, backed by strong attention to the retail segment and robust sales from our premium value-added products. This has led to a strong quarter with 29 per cent Ebidta growth," said Ajay Kapur, managing director and CEO.

However, in a post-result note, Emkay Global’s analysts pegged the Ebidta at Rs  4.07 billion, an increase of 11.7 per cent yoy, after adjusting for other operating income of Rs  996 million (for a like-to-like comparison). Going by these estimates, the profit figure would be below the consensus estimate of Rs  4.71 billion.

Nonetheless, the sequential decline in profitability is not a comforting sign, considering the seasonally strong period. Even going by the reported numbers, operating profit was down 6.3 per cent sequentially from Rs 5.41 billion in the December quarter. 

The per tonne profit declined from Rs 922 in December quarter to Rs  815 in Q1CY18.

Beyond the operational performance, the net profit number, however benefited from a 30 per cent year-on-year fall in interest costs, while depreciation charges fell by 4.6 per cent in Q1CY18. On the flip side, an 84 per cent surge in tax outgo restricted the growth in profit. Moving forward, as the ACC-Ambuja merger has been called off, the street will be keeping an eye out for the benefits that can be accrued from the master supply agreement between the two companies.

With not much visibility on the capacity expansion, cement prices will be the key driver of investor sentiment and the company’s profitability. For now, analysts’ recommendations suggest limited upside in the stock. Motilal Oswal Securities, Edelweiss and Antique Stock Broking had Neutral/Hold ratings on Ambuja, prior to results. After results, Emkay Global has maintained its reduce-rating, with a price target of Rs  226.