Lower realisations hurt profitability of Ambuja

Cement sales volumes surprise positively but not enough to offset impact of soft realisations

Ambuja Cements’ numbers for the June quarter were lower than Bloomberg consensus estimates but not as bad as those of ACC. Both are owned by the Holcim group. Ambuja surprised by posting volumes of 5.95 million tonnes (mt), up two per cent year-on-year and 9.6 per cent sequentially, beating Street expectations of 5.6-5.7 mt. The realisations, however, were subdued as cement prices in north and west India, from where Ambuja derives 65 per cent of its sales, have been softer than last year’s. This saw Ambuja’s per-tonne realisations at Rs 4,239, lower than the Rs 4,632 in the year-ago quarter.



With volumes offsetting some of the pressure seen on realisation, Ambuja was able to deliver net sales of Rs 2,493 crore, closer to the Bloomberg consensus estimate of Rs 2,507 crore. The decline in realisations and higher costs, however, impacted operating performance. Thus, earnings before interest, taxes, depreciation, and amortisation (Ebitda) at Rs 384 crore was lower than estimates of Rs 399.6 crore, while net profit at Rs 226.4 crore, too, came lower than estimates of Rs 262.7 crore.
 

Although not strictly comparable, Ambuja’s reported Ebitda per tonne at Rs 653, much better than ACC’s Rs 442 but lower than Rs 900 reported by UltraTech, which like ACC is a pan-India player. This is why UltraTech remains the top pick of analysts in the large-cap cement universe, and commands premium valuations on the bourses.



Not much respite is expected for cement companies as the monsoon season has picked up and the September quarter is traditionally a soft period. Hence, Shrenik Gujrathi of Angel Broking and analysts at Reliance Securities in their post-result notes maintain their hold/neutral ratings on the Ambuja stock. Analysts at Ambit had said Ambuja, behemoth of the past, was losing sheen, as limited expansion drags market share and volume growth. What could lead to gains for Ambuja, according to Piyush Jain at Morning Star, is the expected merger of ACC, Ambuja and Lafarge. The merger will drive synergy benefits and also make the combined entity a formidable bet.

It is perhaps due to this anticipation that the stock, priced at Rs 235, is trading at a high replacement cost of $161 based on CY16 estimates. While a spurt in demand and realisations will improve the Street’s sentiments and can drive stock prices higher, it might not happen soon.