Ambuja Cements: Rising volumes fail to mitigate cost pressures, stock falls

Better utilisation and good demand enabled Ambuja's cement volumes grow 9% year-on-year (YoY) to 5.46 million tonnes (MT) in the quarter, ahead of estimates

The strong volume growth clocked by Ambuja Cements during the September quarter (Q2) failed to offset the pressure on account of higher costs. The rupee depreciation, high crude oil prices, and firm coal and pet coke prices, all impacted profitability
even as Ambuja saw its capacity utilisation improve to 74 per cent as compared to 68 per cent last fiscal year.

Better utilisation and good demand — led by healthy growth in the infrastructure and housing sectors — enabled Ambuja’s cement volumes grow 9 per cent year-on-year (YoY) to 5.46 million tonnes (MT) in the quarter, ahead of estimates.

Motilal Oswal Securities, for instance, had estimated volumes at 5.26 MT. The volume growth was on similar lines as reported by its subsidiary, ACC (10 per cent growth YoY), though lower than UltraTech’s 20 per cent growth that benefited from capacities acquired from JP Associates.

 

The 1.7 per cent sequential increase in realisations helped Ambuja. UltraTech, too, had reported similar increase in realisations, though ACC disappointed with a 1.7 per cent sequential decline in the metric. 

The bigger issue, however, is rising costs that intensified for Ambuja, as has been the case with peers. The cost per tonne rose 11 per cent sequentially (up 5 per cent YoY) to Rs 4,131, led by higher raw material costs and other expenses.

Per tonne profitability at Rs 656, thus, came lower than analysts’ estimates of Rs 700-800. ACC recorded a lower per tonne profitability of Rs 580, while UltraTech’s was Rs 750, in line with analysts’ calculations.

With weaker operating performance and a 34 per cent decline in net profit YoY, the Ambuja stock, which fell 2.3 per cent after results last week, has lagged most peers.

Moreover, while Ambuja plans to set up a 3.1 mt clinkerisation plant in Rajasthan, of which 1.7 mt (10 per cent of existing capacities) will be commissioned in the second half of 2020, analysts aren’t excited yet.

Edelweiss says Ambuja’s volume growth is expected to stay muted until completion of its proposed clinker expansion in H2CY20, roughly 21 months from now. After a muted quarterly performance, Motilal Oswal Securities has also cut its CY18 and CY19 estimates of operating profit by 4 per cent, and net profit by 7-12 per cent, respectively. Their target prices range from Rs 215-230 for the stock, trading at Rs 192 levels.