Stock Review: AMBUJA CEMENTS

Ambuja Cements' results for the June '11 quarter reflect once again the difficult operating environment for the broader cement industry, given a rapidly rising cost structure. Also, one typically witnesses a slowdown in construction activity, especially from late May onwards in the run-up to the monsoon season, and the resulting sluggish demand for cement in the June '11 quarter.

Ambuja Cements' operating profit margin fell 340 basis points YoY to 27.4% in the second quarter of CY11 (the company follows a calendar year for its financial results) while total operational income rose 4.8% YoY. No doubt, the company's realisations on a per tonne basis rose nearly 7.2% YoY to . 4,138 in the June '11 quarter. But that was not sufficient to cover higher costs. For instance, power and fuel costs of the company rose nearly 27% YoY on a per tonne basis in the quarter under review. Its dispatches also weakened by 2.2% YoY to 5.29 million tonne in the June '11 quarter.

A high-cost structure also resulted in the company's net profit that declined 11.2% YoY in the second quarter of CY11. Nevertheless, the results for the June '11 quarter were broadly in line with analysts' estimates. The stock rose 1.6% to . 132.8 on Thursday. Ambuja Cements had also grappled with a fall in operating margins in the March '11 quarter on a YoY basis, and also during its financial year ended December '10.

Going forward, the September quarter is typically a weak quarter for the cement sector, given the monsoon season and broad curtailment of construction activity. The company had expanded its capacity by nearly 0.9 mt during the June '11 quarter and it would help ramp up its total cement output over the next few quarters. However, analysts are concerned that rising home finance rates could slow down the real estate sector and, in turn, impact cement demand in the short term. Ambuja's capacity was 25 mt at the end of CY10.

Also, key operational costs for the cement sector remain at elevated levels and remain a cause for concern, in the short term. The stock trades at a P/E of nearly 17.5 times on a trailing four-quarter basis and is quite expensive.