Ambuja Cements: Higher costs offset gains from rising volumes

Future volume growth, profitability improvement in rising costs environment key to instil confidence

Ambuja Cements' performance for the quarter ending March 2017 was no different from its subsidiary, ACC. While sales volumes improved, the pressure of rising costs was well evident.

The company said that production costs were impacted on account of higher pet coke and imported coal prices. Sourcing of fly ash from longer leads (distances) and an increase in diesel prices led to higher freight costs. This impact was partly offset by cost reduction initiatives and lower gypsum cost. Thus, operating Ebitda for the quarter at Rs 394 crore came lower against Rs 452 crore in the corresponding quarter last year. Ebitda is earnings before interest, tax, depreciation and amortisation.

Some respite was provided with the company reporting cement volumes at 6.02 million tonne (MT), up three per cent year-on-year on a high base. Since December quarter had seen the impact of note ban, the sales volumes grew 20 per cent sequentially as the effect subsided.

The company has seen per tonne realisations at Rs 4,146, a rise 2.4 per cent year-on-year but a decline of 3.9 per cent sequentially. Better cement volumes helped revenues at Rs 2,533 crore grow 5.3 per cent year-on-year and 15.3 per cent sequentially and came in line with Bloomberg consensus estimates of Rs 2,511 crore. However, rising costs have impacted operating performance more than expected.  

Ebitda came slightly lower than Rs 407 crore indicated by Bloomberg consensus estimates. Per tonne Ebitda at Rs 597 was 16.6 per cent lower on sequential basis though improved 3.2 per cent year-on-year, as per Reliance Securities. With operating performance slightly lower than expectation, net profit at Rs 246 crore also came slightly lower than Rs 254 crore estimated by Bloomberg.

Moving forward, cost controls on the back of rising costs scenario remains one of the key factors to be watched for. The trend of improving cement prices bodes well and if sustains will accrue benefits. Recent channel checks by Edelweiss shows that there is a demand push, especially in the East and some parts of North/West markets. While this is encouraging, the concern emanates from their other observation that there could be supply constraints with some markets suddenly witnessing scarce fly ash/wagon shortage as and when regulatory tightening on overloading takes effect. Fly ash sourcing has already taken a toll on profitability in March quarter too for Ambuja. Also, cost benefits from ACC's amalgamation and reducing lead distances for procuring fly ash and other raw material is yet to be seen.

The other concern remains on slow capacity addition by Ambuja Cements. Analysts at Emkay Global say that they expect volume growth of the company to remain below its peers in absence of future expansion plans. Sales volume of the company remained flat during the calender year 2012-16; also the financial year for Ambuja.Though Emkay says that the comforting factor is sustenance of higher cement prices in key regions, they arrive at a target price of Rs 228 for a stock trading at Rs 246 levels.