Ambuja Cement beats peers in June quarter

Good sales volumes have helped drive revenue growth for the three large cement companies, as the all-India average realisations have not provided significant benefits, while costs escalated.

The all- India prices at Rs 306 a 50-kg bag were marginally higher than Rs 301 a bag in the previous quarter and Rs 291 a bag in the year-ago period. The trend seen with UltraTech Cement was also seen in the case of ACC. The costs rose for Ambuja, too, but it saw better profitability, being a regional entity.

ACC's sales volumes at 6.35 million tonnes (mt) during the quarter grew 3.8 per cent over a year. Ambuja saw better volume growth of almost 11 per cent to 5.8 mt during the June quarter (it is the second quarter for ACC and Ambuja, which follow a January-December financial year). This helped the sales turnover to Rs 3,009 crore, marginally beating Street estimates of Rs 2,992 crore for ACC. Ambuja's Rs 2,706 crore beat Street expectation of Rs 2,592 crore by a wider margin compared to ACC, led by better volumes and realisation. While all-India per bag average prices could improve only five per cent year-on-year, due to much softer prices in South India, Ambuja did not feel that heat. The western/north region where Ambuja operates saw price gains of 5-14 per cent.

Increasing costs impacted profitability of all players. Said ACC, "Manufacturing and distribution costs continued to face escalation, though we derived some benefits from the ongoing cost leadership programme and an increase in the sales of premium products". ACC saw freight costs rise sharply by 17.3 per cent to Rs 670 crore, mainly because of increase in rail freight rates (this segment accounts for half of its transport). Fuel costs rose 5.3 per cent to Rs 621 crore. Thus, its Ebitda (earnings before interest, taxes, depreciation and amortisation) at Rs 452 crore came lower than Rs 490 crore in the year-ago quarter and profits at Rs 243 crore came lower than the Bloomberg expectation of Rs 273 crore. Ambuja saw its power costs increase 12.3 per cent and freight costs by 11.4 per cent. However, with better realisations and volume growth, it reported Ebitda of Rs 588 crore, in line with Bloomberg estimates. The net profit of Rs 409 crore beat Bloomberg estimates ofRs 381 crore, largely due to tax reversals boosting other income.

The stock price of ACC, that touched lows of Rs 1,430 after declaration of results, gained lost ground before closing one per cent up at Rs 1,469. Ravi Sodah at Elara Capital said with the disappointment at UltraTech's numbers, market participants had factored in the same for ACC. Hence, the stock did not correct much. Ambuja's numbers came after market hours.

UltraTech, the largest cement company, had impressed with better sales growth of 16 per cent over a year. The company is ahead of its Holcim group peers in terms of capacity expansions and better presence across the country.

In comparison, ACC sees almost 40 per cent of the capacities currently dependent on South Indian market demand, which has remained soft. Also, its capacity expansion of 3.5 mt in Chhattisgarh are likely to come on-stream by the end of calendar year (CY) 2015.

ACC, though, might also benefit from reversal in demand in south India after formation of the two states of Telangana and Seemandhra. But, the benefits will be gradual, since ACC already has manufacturing facilities based in Karnataka.
 
ACC and Ambuja will also see synergy benefits after the restructuring as Ambuja acquires majority stake in ACC. Nevertheless, any significant gains are likely to be felt in CY16. Says Chirag Shah at Barclays, “About 85 per cent of sales go through dealers (trade sales), while the rest is sold directly to end-users and after the restructuring of the Holcim companies, ACC and Ambuja, the management intends to optimise the supply chain (through clinker and cement swaps across plants) and expects synergy benefits in procurement as well.” He adds that the company expects these benefits to be realised in phases, following the completion of the transaction.

In this backdrop and given reasonable enterprise per tonne valuations of $127, ACC remains a long-term bet for investors. With North India likely to see better demand growth, Ambuja, being a regional entity, can benefit faster.

UltraTech, given its adequate capacities and balanced presence across the country, remains the top pick, say analysts. Sanjeev Kumar Singh at Centrum Broking says Ambuja, though over a period of time, will see ‘holding company’ discounts.

UltraTech, Ambuja and ACC are trading at per tonne replacement costs of $185, $174 and $127, respectively, he adds.