Visible cracks

Weak price realisations and higher-than-expected costs crimped Ambuja Cements’ numbers for the quarter ended December.
Revenues increased 9.1% year on year to Rs 1,771 crore, helped by a 4.7% increase in the total sales volume. Domestic volumes did relatively better than exports and rose 8.5%. However, a 60.8% decline in exports on account of poor demand from the Middle East offset the gains. Net price realisations increased 4.3% to Rs 3,690 per tonne.

Operating profit margins expanded 80 basis points (100 basis points make one percentage point) to 24.3%. This was mainly because of a 9.5% drop in raw material costs to Rs 443 per tonne given that the cost of clinker purchases was lower. Clinker prices fell in line with weak cement realisations. Lower imported coal prices on a year-on-year basis and higher usage of captive power led to some savings in power and fuel costs, too.

Operating profit thus went up by 13% to Rs 431.2 crore, though some analysts were disappointed with Ambuja’s operating performance.

Shirish Rane, Salil Desai, Ashish Shah and Nikhil Salvi of IDFC-SSKI research maintain that operating profit was below their estimate of Rs 520 crore as revenues came in below estimate and freight (due to inter-unit movement of clinker) and other costs were higher than anticipated.

Net profit increased 6.9% to Rs 239.7 crore.

Commissioning of new clinkerisation units in the current quarter is expected to boost volumes and also help save costs given a lower dependence on purchases.

However, the industry outlook is poor, given the massive capacity additions expected. This is likely to weigh heavily on cement stocks in the days to come, as it would put pressure on cement prices. “We remain directionally bearish on the cement sector on an imminent oversupply situation over the next 6-8 months,” the four IDFC-SSKI analysts wrote in a note to clients on February 4.
At Rs 100.70, the stock trades at 14 times its estimated earnings for 2010. Investors should wait for outlook to improve to consider it.