Highlights:
- Quarterly volumes grew by 2 percent
- Margins improved sequentially
- A decline in input costs is expected to ease cost pressure- Recommend using dips to build positions in the stock
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Ambuja Cements, India’s third-largest cement maker reported a tepid first quarter. The earnings disappointed with muted volumes and realisations and margin pressure.
The bottom line, however, improved helped by a dividend received from its subsidiary -- ACC.
Ambuja Cements reported 2 percent revenue growth to Rs 2,928 crore in Q1 (March quarter) of CY19. But earnings before interest, tax, depreciation and amortisation (EBITDA) fell 9 percent with the margin slipping 190 bps.
Key Highlights
- Cement volumes for the quarter stood at 6.37 million tonnes (MT) against 6.22 MT Q1 CY18, a growth of just 2 percent year-on-year (YoY). The volume growth was softer than other players -- UltraTech and ACC. On the back of the mild improvement in volumes, Ambuja’s capacity utilisation rose to 86.6 percent in January-March, from 85 percent a year earlier. The same for the full calendar 2018 stood at 82 percent.
- The premium product range, which includes Roof Special, Compocem and Cool Walls, continues to gain market traction. While the premium products had double-digit growth, the sales of the premium cement rose 14 percent YoY.
- Ambuja’s realisations remained flat during Q1 as cement prices were stable in its key operating markets - North and West.
- Easing of cost pressure (mainly power and fuel along with freight and forwarding) and cost-saving initiatives (usage of low-cost wet fly ash, improvement in clinker factor and the like) boosted Ambuja’s operating margins on a sequential basis. The margins in the period under review improved to 15.8 percent, from 14.1 percent in Q4 of 2018. On a per tonne basis, the cost pressures declined 4 percent sequentially, which led to a 10 percent sequential jump in EBITDA per tonne.
Read: ACC: March quarter result mixed, accumulate on corrections
Outlook and recommendation
- The outlook for the company appears positive as the sector continues to witness strong demand from infrastructure and housing segments.
- While the volume growth in Q1 was impacted by competition as well as capacity constraints, we expect the same to move in line with industry standards (6-8 percent) from H2 onwards. The company has a strong presence in the North and West and remains well-positioned to benefit from the anticipated upcycle in the sector.
- In terms of valuations, Ambuja Cements (CMP: Rs 221; market cap: Rs 43,863 crore) trades at a trailing consolidated EV/EBITDA multiple of 9.5x. The cost pressures have started to ease and should aid margin improvement in the future. Besides, the synergies from the Master Supply Agreement with its subsidiary ACC should further improve its margin profile.
Given the positive outlook on the sector and the initiatives being taken by the management, we advise long-term investors to use the dips to gradually build positions in Ambuja Cements.
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Disclaimer: Moneycontrol Research analysts do not hold positions in the companies discussed here
