Ambuja Cements Q2 net down 45%, realisations/tn down 9.3%

The company follows January-December as its financial year.

Ambuja Cements sold 5.88 million tonnes of cement during the quarter, a growth of 1.6 percent compared to 5.79 million tonnes sold in the year-ago period due to muted cement demand. Realisations fell 9.3 percent year-on-year and 6.5 percent quarter-on-quarter to Rs 4,240 per tonne.

The company said mixed macro-economic indicators are pointing towards sluggish growth in cement demand in short term. With the onset of monsoon, cement demand is expected to remain subdued in the next quarter, it added.

Operating profit plunged 35 percent year-on-year to Rs 383.8 crore and margin declined 630 basis points to 15.3 percent in June quarter due to weak realisations and higher freight & forwarding cost. Analysts had estimated operating profit at Rs 401 crore and margin at 16.1 percent for the quarter.

"Lower cost of input materials coupled with improved operational efficiencies has helped in reduction of overall costs. Nevertheless, these could not fully mitigate the impact of lower sales realisation. As a result, operating EBITDA for the quarter was lower by 34.7 percent," it explained.

Total freight and forwarding cost increased 5 percent due to internal materials transfer while power and fuel cost declined 6 percent.

During the quarter, other income fell 23 percent year-on-year to Rs 105.7 crore while finance cost shot up 56 percent to Rs 31.6 crore and tax expenses dropped 52 percent to Rs 83 crore.Hence, the rise in freight and forwarding costs coupled with dip in sales on low demand adversely hurt Ambuja’s margins this quarter.Piyush Jain, Equity Research Analyst, Morningstar Investment Advisor says though the worst is over for the year, the second half will remain subdued. Though the western market was still resilient, Ambuja suffered most from the northern market due to pricing, he says. He expects cement sector to do better December onwards because of the road and railway constructions picking up.However, Rashesh Shah of ICICI Direct believes pricing and volumes, especially in the rural regions, to pick up third quarter onwards on the back of normal monsoons. Below is the edited transcript of Piyush Jain and Rashesh Shah's interview with Nigel D’Souza and Latha Venkatesh on CNBC-TV18. Nigel: Margins coming in at around 15.3 percent, is that a big disappointment in comparison to what you were estimating?A: Yes surely, we were estimating the Earnings before interest, tax, depreciation and amortization (EBITDA) margins to come somewhere around 16.9 percent, so this definitely would be a disappointment and would be largely reflecting the fall in the prices which we saw in the northern market. So, the western markets were still resilient in this quarter but Ambuja has clearly suffered from the northern market. I am still not able to see the volume number but the revenue numbers seems to be in line. Latha: What could have worked so much lower for the margins? Should not the lower fuel costs have actually helped margins? This is a fairly serious fall that you are seeing in margins, a year ago it was 21.6, it falls all the way to 15.3. Any further explanation as to why the margins should have fallen so much when costs also should have fallen?A: Clearly the freight costs which have been the common cost factor across the industry if you see ACC, if you see Ultratech, we are clearly seeing pressure around the freight and forwarding expenses. There have been levies and when we see in this quarter what happened for Ambuja, clearly the northern market was not good which means the prices were not favorable, so you were not able to pass through the entire increase in the cost to unto to the consumers. So that has been an exponential factor on the margin down side.Nigel: First look at it, I will give you some numbers. On the topline itself we are seeing a number of close to around Rs 2,500 crore, the margins though have come in a tad bit disappointing. We were estimating a number of more than 16 percent; it has come in closer towards 15 percent. Is that a big miss?A: Yes especially on a margin side though the topline has remained in line with our estimates, we have clearly seen a margin pressure in this quarter. This is mainly due to the freight and other related costs because this company doesn’t have presence in the south and in this quarter we have seen a pressure across all the regions except south as far as demand and pricings are concerned, so the freight cost might have played a bigger role in the margin contraction apart from the other costs.Latha: What is you sense, what will the stock do tomorrow? Will it respond to this or is the fall factoring in most of the bad news already and the markets will start looking at future quarters?A: As far as this company is concerned, though the topline has remained in line with our estimates, there is a pressure only on the cost side and going forward H2 is looking very good especially post monsoon- monsoon has now remained, the way it is happening it is looking the monsoon is going to remain normal and we are expecting rural side demand to ramp up in H2.So, as far as this company is concerned, we would see some marginal pressure on the pricing side but on valuation side it is one of the good stocks after Ultratech Cement.Posted by Sunil Shankar Matkar