Raw material prices, cost controls prop up Ambuja Cements, ACC’s March qtr

Expansions, strong balance sheet and attractive valuations are supportive at a time when demand outlook is uncertain

Ambuja Cements, like its subsidiary ACC, posted a strong operating performance for the March quarter (Q1) on Monday after market hours, even as the cement makers’ sales volume came under pressure.

Ambuja’s sales volumes, impacted by the Covid-19-led disruption, at 5.77 million tonnes (MT) declined 10 per cent year-on-year (YoY) in Q1 (both companies follow the January-December accounting year). Soft raw material prices and cost controls helped boost operating margins; realisations, too, were better.

Ambuja’s predominant exposure to the northern and central Indian markets, as well as Gujarat — which have seen stronger realisations compared to east India and south India — helped. Ambuja was able to report higher per tonne realisations as compared to ACC. The average realisation, which stood at Rs 4,792 per tonne, was up 7.2 per cent YoY and 3.2 per cent sequentially in Q1.

Improving realisations cushioned the decline in sales volume, and hence net sales were down only 3 per cent YoY to Rs 2,760 crore.

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At the operating level, while coking coal prices have continued to decline, pet coke and diesel prices, too, have fallen. This helped lower per tonne energy and logistics costs by Rs 135 and Rs 21, respectively, in Q1.

Thus, operating profit improved 30 per cent YoY to Rs 603 crore. Adjusted for Rs 67.5 crore of other operating income, earnings before interest, tax, depreciation and amortisation (Ebitda), according to analyst estimates, grew 40 per cent YoY and 19 per cent sequentially to Rs 534 crore.

Consequently, per tonne profitability at Rs 928 was much higher than Rs 601 seen a year back and Rs 687 in the December 2019 quarter. The results were ahead of analysts’ estimates. However, the stocks slipped in Tuesday’s trade because of uncertainty over the extension of the lockdown.

ACC, too, had witnessed similar improvement in operating performance despite pressure on volumes, according to its results that were announced last week. Its Ebitda at Rs 517 crore had grown 12 per cent YoY, while operating profit per tonne stood at Rs 741, versus Rs 579 a year ago and Rs 539 in the December quarter.

However, profitability improvement for ACC was led more by softer input prices and cost optimisation measures, than realisations. ACC, being a pan-Indian player, did feel the heat of soft cement prices in south India and adjoining regions.

Thus, its realisation per tonne improved only marginally by 0.9 per cent sequentially, while the same was down 0.3 per cent on a YoY basis.

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Ambuja’s net profit at Rs 399 crore grew 6.3 per cent YoY, after adjusting for one-offs/exceptional items. Post results, Binod Modi of Reliance Securities said Ambuja’s performance is a beat on all the parameters, mainly led by the improvement in operating cost and superior realisation.

Moving forward, Ambuja remains better placed as compared to ACC in terms of exposure to regions, which are not seeing overcapacity and thereby pushing down realisations. The cushion to realisations remains important at a time when demand is under pressure and there is uncertainty over the resumption of construction activities.

Analysts feel even if the lockdown is lifted soon, April and May will still be a washout. The Monsoons will impact construction activities from mid-June onwards. Hence, for all practical purposes, one may see a major demand uptick only in October, after the rains.

The positive for both ACC and Ambuja is that their new capacities can also come on stream by then.

While ACC is likely to start commissioning its capacity expansion in Chattisgarh, Ambuja Cements is targeting completion of its 4.7 MT per annum capacity (3.1 MT clinker and 1.6 MT grinding) at Marwar in Rajasthan by December 2020.

This can further strengthen Ambuja’s presence in the key north and central Indian, and Gujarat markets.

Both companies have a strong balance sheet and this will make them a defensive bet in the current subdued demand environment, says Kunal Shah at YES Securities.

Trading at about 25 per cent discount to replacement cost, stock valuations too are compelling.

Overall, the lined-up capacity expansions, stable cost structure, and attractive valuations may aid further upside for ACC and Ambuja.