Ambuja grapples with return rate

The going hasn't been easy for Ambuja Cements, and experts see the current year as no different. CLSA's analysts said losses in market share have continued to hurt Ambuja, which has seen slower capacity expansion. In stock price, Ambuja has lagged peers UltraTech and Shree Cement.

Though 2016 started on a strong note and the first half was fairly decent in sales volume growth, the heat was felt by all cement makers in September quarter (seasonally weak) and December quarter impacted by note ban. Though peers UltraTech and Shree Cement could partly ease up, thanks to regular capacity expansions, ACC and Ambuja took more heat due to slower capacity addition.

Ambuja, which saw 9.9 per cent sales volume growth in March 2016 quarter, saw decline of seven-eight per cent in December quarter; volumes during 2016 came at 21.12 million tonnes (mt), lower than 21.53 mt in 2015. The company follows January-December financial year. 

After December quarter results, firm exuded optimism on prospects led by government's focus on infrastructure and housing, but analysts at Emkay Global said lack of capacity expansion remained a concern. Analysts at JM Financial said loss in market share in past few years was a concern and they awaited Ambuja and ACC to roll out capacity expansion plans to ease worries.

With sales volumes declining, operating profit margin remaining subdued, and Ambuja completing acquisition of 50.01 per cent stake in ACC from its parent (Lafarge-Holcim) in 2016, the return ratios got compressed. Return ratios fell to over a two-decade low on cut in operating profit margin and decline in asset turnover, said analysts at CLSA. "Ambuja's standalone return on equity (RoE; also return on shareholders' funds) declined to 6.7 per cent (from 8.5 per cent in 2015) led by lower operating profit margin, along with a decline in asset turnover, partly due to investment in ACC," said CLSA. Consolidated RoE was 7.8 per cent. 

Ambuja is working on capacity expansions and plans 1.7-mt yearly clinker capacity  in Rajasthan. This is a part of the earlier plan for 4.5-mt yearly capacity, which means the remaining capacity may come in phases, say analysts. ACC had started 1.35-mt-yearly cement grinding unit in Jharkhand at the end of October 2016, thereby completing the new integrated project with its clinkering line of 2.79 annual mt and grinding unit of 1.10 annual mt in Jamul. While these should bode well, the pricing pressures in east India (given capacity additions by the rest of the industry) may weigh on ACC.

With ACC acquisition completed, all eyes are on synergy. With the impacted mines of ACC coming back, plans for purchase of clinker from Ambuja were dropped in 2016, further reducing the inter-group transaction; thus, analysts at Credit Suisse say the scope for synergy is limited as the group wants to retain both brands. 

Analysts at CLSA believe the improvement in return ratios for Ambuja will only be gradual. Analysts at Centrum Broking say Ambuja will continue to deliver muted sales volume growth. Though they expect it to deliver a compound annual growth of 15 per cent in operating profit during 2016-18, they still believe RoE and return on capital employed will remain muted at seven-eight per cent over next two years.

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