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Overall, the outlook for volumes and margins looks weak for Ambuja Cement going into the
2HCY11. The company cautioned of inflation to all costs, and given the over-supply position in
the market, there is a risk to these costs not being passed on fully.
Management guides to muted CY11 demand growth
The management expects demand growth in CY11 would at best be 4-5% and 8-9% in CY12.
The improvement in Ambuja's despatch growth in July 2011 was more a reflection of lower
base effect of July 2010, and does not signify any improvement in the macro demand
environment.
The Company operates in 3 regions - west (40% of sales), north (40% of sales) and east
(20% of sales). The demand growth in 2QCY11 was 2% in West, 2% in North India, and 6%
in East.
Margin pressure due to all round costs increase and cut in realizations
There has been all round cost inflation in this year 1) coal costs have risen by 28%; 2)
electrical energy cost have risen by 17%; 3) captive power generation cost has risen by 16%;
4) the inflation in gypsum costs was 17% and that of bags was at 14%; 5) costs of distribution
( freight ) was also higher by 12-13%.
It sources 45% of its coal from linkages (Coal India), 50% is imported and 5% is from open
market. The linkage coal has come down from 50% earlier.
The company averaged a selling price of Rs205 in 2QCY11, as compared to the peak
realisation of Rs212/bag in March 2011. From the peak levels, the price had declined by
Rs15/bag by June 2011. The management stated that there has been a further Rs5-10/bag
decline in July 2011.
For the remaining part of the year management expects EBITDA/mt to be in the range of
Rs800-900/mt.
Capex plans
The company has capacity to produce 17mmt of clinker, and has a peak grinding capacity of
27mmt of cement. However, its cement production capability with captive clinker is around
24mmt. In 2QCY11, it has sourced all the clinker requirements from in-house production.
The company is evaluating 2.2mmt of clinker unit in Rajasthan, and has plans to set up windmills to augment its access to lower cost power.
We remain concerned on low industry utilisation rates.
The cement industry closed FY11 with a capacity of 302mmt, and a domestic demand of
212mmt. We expect the cement capacity to scale to 325mmt by 2012, but the demand
conditions in FY12 so far indicate only flat levels of growth. As a consequence, we expect the
industry to operate at 75% capacity utilisation levels for the next 2 years.
We believe such levels of capacity utilisations in a fragmented industry like India (with over 40
cement players) does expose the sector to pricing competition.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Overall, the outlook for volumes and margins looks weak for Ambuja Cement going into the
2HCY11. The company cautioned of inflation to all costs, and given the over-supply position in
the market, there is a risk to these costs not being passed on fully.
Management guides to muted CY11 demand growth
The management expects demand growth in CY11 would at best be 4-5% and 8-9% in CY12.
The improvement in Ambuja's despatch growth in July 2011 was more a reflection of lower
base effect of July 2010, and does not signify any improvement in the macro demand
environment.
The Company operates in 3 regions - west (40% of sales), north (40% of sales) and east
(20% of sales). The demand growth in 2QCY11 was 2% in West, 2% in North India, and 6%
in East.
Margin pressure due to all round costs increase and cut in realizations
There has been all round cost inflation in this year 1) coal costs have risen by 28%; 2)
electrical energy cost have risen by 17%; 3) captive power generation cost has risen by 16%;
4) the inflation in gypsum costs was 17% and that of bags was at 14%; 5) costs of distribution
( freight ) was also higher by 12-13%.
It sources 45% of its coal from linkages (Coal India), 50% is imported and 5% is from open
market. The linkage coal has come down from 50% earlier.
The company averaged a selling price of Rs205 in 2QCY11, as compared to the peak
realisation of Rs212/bag in March 2011. From the peak levels, the price had declined by
Rs15/bag by June 2011. The management stated that there has been a further Rs5-10/bag
decline in July 2011.
For the remaining part of the year management expects EBITDA/mt to be in the range of
Rs800-900/mt.
Capex plans
The company has capacity to produce 17mmt of clinker, and has a peak grinding capacity of
27mmt of cement. However, its cement production capability with captive clinker is around
24mmt. In 2QCY11, it has sourced all the clinker requirements from in-house production.
The company is evaluating 2.2mmt of clinker unit in Rajasthan, and has plans to set up windmills to augment its access to lower cost power.
We remain concerned on low industry utilisation rates.
The cement industry closed FY11 with a capacity of 302mmt, and a domestic demand of
212mmt. We expect the cement capacity to scale to 325mmt by 2012, but the demand
conditions in FY12 so far indicate only flat levels of growth. As a consequence, we expect the
industry to operate at 75% capacity utilisation levels for the next 2 years.
We believe such levels of capacity utilisations in a fragmented industry like India (with over 40
cement players) does expose the sector to pricing competition.
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