Profitability drop over input costs drives earning cuts for Ambuja Cements

The strong growth in volumes clocked by Ambuja Cements during the September quarter failed to offset cost pressures. Rupee depreciation, higher crude oil prices, and firm coal and pet coke prices impacted input costs and, therefore, profitability, even as the company saw its capacity utilisation improve to 74 per cent as compared to 68 per cent in the year-ago quarter. 

Better utilisations and good demand, led by healthy growth in the infrastructure and housing sectors, enabled Ambuja's cement volumes to grow nine per cent year-on-year 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 year-on-year), though lower than UltraTech's 20 per cent growth, which was supported by contribution from capacities acquired from JP Associates.  

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

The bigger issue, however, is rising costs, which intensified for Ambuja as has been case with peers. The cost per tonne rose 11 per cent sequentially (up five per cent year-on-year) 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 had seen a lower per tonne profitability of close to Rs 580, while UltraTech had managed to report a figure of Rs 750, according to analysts' calculations. With weaker operating performance and, hence, net profit declining 34 per cent year-on-year, Ambuja Cements' stock fell 2.3 per cent on Wednesday. The results were declared post market hours on Tuesday.

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. Those at Edelweiss say that Ambuja's volume growth is expected to stay muted until completion of its proposed clinker expansion in H2CY20, roughly 21 months from now. After the muted quarterly performance, Motilal Oswal Securities has also cut its CY18/19 estimates of Ebitda (earnings before interest, tax, depreciation and amortisation) by four per cent and net profit by 7.12 per cent. The target prices of Motilal Oswal and Edelweiss Securities range between Rs 215-230 for the stock trading at Rs 196.60 levels.   

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