- Cement volumes declined by 9 percent Yo
- EBITDA per tonne touched multi-quarter highs
- Demand to remain weak in the near term- Valuations reasonable at 7.6 times trailing EV/EBITDA
Quarterly results of Ambuja Cements, the third-largest cement manufacturer in India, turned out to be a mixed bag for investors. Revenues were stable, operating profit was higher, but the decline in cement volumes turned out to be a dampener.
Quarterly result highlights
Ambuja Cements revenue declined marginally to Rs 2,978 crore in Q2 CY19. Top line was supported by higher realisations (up 9 percent year-on-year and 12 percent quarter-on-quarter) as the cement offtake during April-June was impacted by general elections and tight liquidity conditions and the volumes came in weaker by 9 percent than the same period last year.
Given the subdued demand environment, the company curtailed its cement production during the period under review. Capacity utilisation for the said quarter dropped to 79 percent in Q2 CY19, from 87 percent in Q2 CY18.
Ambuja’s operating metrics were much stronger despite sluggish volume data. Earnings before interest, tax, depreciation and amortisation (EBITDA) per tonne touched multi-quarter highs as the sharp jump in realisation aided operating profit. During Q2, the company benefited from decline in freight expenditures. However, power and fuel and other expenses continued to remain elevated and had an adverse impact on the overall cost structure.
The company continues to focus on improving realisations through higher sales of the premium segment, which includes Roof Special, Compocem and Cool Walls. To further expand its presence in northern and western markets, the company is planning to set up an integrated cement plant (capacity: 4.6 million) at Marwar Mundwa in Rajasthan.
On the cost front, the management is taking multiple initiatives to rationalise the cost structure. Optimisation of fuel mix, reduction in lead distance and process improvement remain the key focus areas in this regard.
Outlook and recommendation
The growth outlook for the sector appears positive on account of government thrust on infrastructure and housing segments. The sector has witnessed a strong demand in the past 12-18 months, but the second quarter volumes of most cement companies have been tepid and the trend indicates a temporary slowdown due to credit squeeze, along with a moderation in the pace of project execution. Given the subdued demand, cement prices have also softened across regions with the onset of monsoons.
Ambuja Cements trades at a trailing EV/EBITDA multiple of 7.6x, which is at a significant discount to similar-sized peers as well as its own 5-year average historic multiple. While the weakness in cement volumes may persist for a couple of quarters, the stock should be kept on the radar for gradual accumulation with a long-term view as the company enjoys strong fundamentals and remains well positioned to capture the market demand.
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