Ambuja Cements reported better performance than ACC in the recently concluded March quarter, despite being a regional player. Production discipline within the industry also helped maintain a healthy realisation despite the excess capacity. While both the Holcim Group companies, ACC and Ambuja, reported robust top line growth of 19 per cent in the March quarter, Ambuja outperformed on the operating front, backed by an improvement in demand and better pricing in the regions of its presence (mainly north and west), as compared to rest of the country. Ambuja also benefited on account of removal of the import duty on coal.
Analysts expect an improvement in the realisation, though a rise in coal prices could partly offset this gain. The change in accounting policy would also restrict profit growth in the current year. Moreover, the Competition Commission of India (CCI) is likely to give its decision on the charge of cartelisation by the industry; an adverse verdict could impact their performance, as well as sentiment. The stocks had outperformed the BSE Sensex by a good margin since mid-2011 and given the overall outlook, are not trading cheap at calendar year 2012 price to earnings (PE) valuations of 17-18 times.
Volume growth
Ambuja’s volume growth of almost 10 per cent to 6.18 million tonnes (mt) was slightly higher than ACC (nine per cent growth to 6.7 mt) in the quarter. This was mainly driven by robust demand from north and west India, which grew 11 per cent and 15 per cent, respectively, outpacing other regions. Ambuja derives 38 per cent of its sales from western India and 40 per cent from the northern region.
| HOW THEY STACK UP | ||||
| In Rs crore | ACC | AMBUJA CEMENTS | ||
| Q1CY12 | CY2012E | Q1CY12 | CY2012E | |
| Net sales | 3,015 | 11,162 | 2,633 | 9,679 |
| % change | 18.6 | 10.3 | 19.0 | 13.7 |
| Ebitda | 618 | 2,126 | 745 | 2,285 |
| % change | 14.0 | 6.0 | 21.0 | 16.0 |
| Ebitda (%) | 20.5 | 19.0 | 28.3 | 23.6 |
| Adjusted net profit | 428 | 1,278 | 509 | 1,412 |
| % change | 22.3 | -1.6 | 25.0 | 11.6 |
| EPS (Rs) | 8.1 | 68.5 | 2.0 | 9.1 |
| PE (x) | 18.2 | 17.4 | ||
| E: Estimates % change is y-o-y Source- CapitaLine plus, Bloomberg, Analyst Reports | ||||
Realisation (per tonne) for both companies was comparable at Rs 4,256 (ACC) and Rs 4,260 (Ambuja) a tonne. On a sequential basis, however, Ambuja scored over ACC. This again was in the backdrop of firm prices in Gujarat and Maharashtra, that crossed Rs 300 a bag (50-kg), benefiting Ambuja more. ACC was impacted as the prices in the south were barely stable, central India saw a mixed trend and the east saw marginal upside, with just five per cent growth in demand.
Operational data
Higher volumes and realisations, coupled with cost savings, helped Ambuja put up a better show in terms of operational performance, with Ebitda (earnings before interest, taxes, depreciation and amortisation) margin at 28.3 per cent as compared to 27.9 per cent a year before. The government’s decision to remove import duty on coal imports bodes well for Ambuja, as 40 per cent of its requirements are met through import.
Coal India’s increase of prices last year saw ACC’s Ebitda margins dip to 20.5 per cent in the March 2012 quarter as compared to 21.4 per cent in the year before, as it depends largely on domestic coal. Going ahead, though, Coal India may raise prices in the June quarter to pass on the rise in costs and this may impact fortunes of cement companies, especially ACC, analysts say.
Both ACC and Ambuja changed their method of providing depreciation on captive power plants and bore a one-time additional charge that impacted net profit. This would also mean muted profit growth in calendar year (CY) 2012. The adjusted net profit for Ambuja grew 25 per cent. While ACC saw its standalone adjusted profit grow 10.1 per cent, on a consolidated basis, it was up 22.6 per cent year-on-year.
Road ahead
Cement prices have strengthened in most parts of India, up 14 per cent year-on-year and eight per cent sequentially in the March quarter. However, most of the increases have come as a measure to meet the rise in input costs.
Analysts at Citigroup expect prices to firm up further as the demand–supply equation moves in favour of producers. Volume growth is also expected to be healthy. Analysts at Motilal Oswal Securities expect cement volumes of ACC and Ambuja to grow by 10 per cent each to 26.1 mt and 23.6 mt in CY2012. It will be interesting to see the trend in profitability in the June quarter, given the likely rise in coal prices.
Imposition of any penalties by CCI will also have a bearing on the financial performance of cement producers (a total of 40 companies are facing this charge). Based on the recent trends, the penalty is likely to be six-seven per cent of total revenue or around 80 per cent of net profit, Macquarie Research suggests.
At the current valuation of ACC (enterprise value or EV per tonne of around $150) and Ambuja (EV per tonne of $162) and a PE of close to 18 times CY12 EPS, the earnings estimates do not factor in the risks. Given that valuations are on the higher side, the stocks have limited upside from the current levels, analysts say.
