Ambuja's Q2 earnings were good, but not enough to allay growth concerns

26 Jul , 2021 By : Kanchan Joshi

Ambuja Cement Ltd reported robust operating performance in the June quarter. Akin to peers ACC Ltd and Ultratech Cement Ltd, its Ebitda at Rs960 crore, up 61% year-on-year, beat analysts' expectations, driven by better-than-anticipated realisations and lower costs. Ebitda is short for earnings before interest, tax, depreciation and amortization.

Thanks to firm cement prices across India in the June quarter, its realisations at Rs5,251/tonne, rose 5% sequentially. Higher sales of value-added products, which were up by 69% y-o-y and now contribute 12% of total sales, also resulted in strong realisations.

On the cost front, its ‘ICAN’ initiatives and the master supply agreement with ACC has resulted in better control over cost, despite a sharp increase in various input costs.

Yet, reacting to the earnings, the stock of Ambuja fell around 2% in opening trade on Monday. According to analysts, the recent run-up in the stock, factors-in these positives, prompting investors to book profits.

Analysts at Nomura Financial Advisory and Securities (India) Private Limited said that Ambuja's Q2 performance was good, but its margins are likely to compress in the second half. They say, the stock's recent outperformance prices in cost-efficiency benefits. Shares of the company hit a new 52-week high of Rs409 on the NSE on 23 July. Ambuja follows the calendar year as financial year.

As far as volume growth is concerned, in the June quarter its volumes at 6.42 million tonnes, were up around 53% from 4.19 million tonnes, in the same quarter last year.

The company's long pending and delayed expansion at Marwar Mundwah in Rajasthan is likely to be completed in the next quarter. It is expected to contribute meaningfully to volume growth in CY22.

However, analysts at Nirmal Bang Securities Ltd are of the view that given the fact that capacity expansion, which is happening after a long time, is not enough to sustain higher-than-industry volume growth or regain the lost market share and utilization of cash on the balance sheet is not directed towards growth, the company has to do more for further valuation re-rating.

Sharing a similar worry, analysts at Motilal Oswal Financial Services Ltd say, the Marwar–Mundwa expansion should drive an above-industry CAGR of 12% in volumes over CY20–23, however, growth visibility remains weak beyond CY22 due to limited capacity additions. CAGR is short for compounded annual growth rate.