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MOSL: AMBUJA CEMENT (ANNUAL REPORT UPDATE) (Neutral)-Profitability impacted by cost pressure

Ambuja Cement (Annual Report Update): Profitability impacted by cost pressure; Increase in working capital further impacts cash flow

(ACEM IN, Mkt Cap USD6.4b, CMP INR226, TP INR206, 9% Downside, Neutral)

 

We have analyzed Ambuja Cement’s CY18 annual report. The infrastructure and the government’s ‘Housing for All’ initiative led to the cement industry growing 9% in CY18. But, Ambuja Cement witnessed its profitability getting hurt due to increased raw material and fuel prices. Key takeaways: 

Infrastructure, and ‘Housing for All’ led CY18 Industry growth of 9%

• The Indian cement industry grew 9% in CY18 on faster execution of stalled infrastructure and construction projects, according to Ambuja management.
• Infrastructure (roads and metros, in particular) and the government’s ‘Housing for All’ program (rural and urban), were the key demand drivers. Implementation of the Real Estate (Regulation and Development) Act (RERA), 2016, also brought about a paradigm shift in the construction sector, making it transparent.
• Despite capacity expansion during 2018, thanks to robust demand, capacity utilization of the industry improved 2-3% v/s 2017. Ambuja Cement’s capacity utilization increased by 4pp to 82% during CY18 led by volume growth of 5.4%. 

Higher raw material and fuel prices hurt profitability

• ACEM’s raw material cost was impacted due to an increase in the fly ash cost. However, it was partially mitigated through optimal sourcing and a judicious change in the gypsum mix, which helped the company restrict increase in gypsum cost by only 1% as against the previous year. The company also saw a reduction in the per ton cost of Bauxite and Iron Dust, which further helped to reduce the impact of rising costs of raw materials.
• Power & fuel cost/t increased 8% YoY led by an increase in the prices of imported coal and petcoke. However, dynamic fuel mix strategy helped the company to restrict the impact. The usage of alternate fuels in kilns also increased by 2%. Further, the company consumed 69% of its total power requirement from captive sources, including an increased usage of the Waste Heat Recovery System. A decrease in rate of purchased power also helped to lower overall power & fuel costs v/s the previous year.