INDIA: Fuel, freight costs drag down Ambuja Cements’ profit

Operating profit margin at around 18% was 650 basis points lower from a year ago, and slightly lower from the previous sequential quarter

Pressure on profit margins due to spiralling costs coupled with customer resistance to higher cement prices has been the story for cement makers in the last several quarters. Ambuja Cements Ltd’s December quarter was no exception.

Operating profit margin (OPM) at around 18% was 650 basis points lower from a year ago, and slightly lower from the previous sequential quarter. One basis point is a hundredth of a percentage point.

Higher coal prices was one reason for the steep 30% year-on-year (y-o-y) jump in power and fuel cost per tonne of cement produced. Likewise, freight costs per tonne inched up 4% y-o-y and about 3% quarter-on-quarter.

A contraction in raw material costs as a percentage of sales eased the pressure on margins partly—the firm commissioned two clinker kilns in 2010, leading to lower purchase of clinker.

But Ambuja Cements could not register robust revenue growth either. One reason was its exposure to the eastern and northern markets, where cement prices were still sticky compared with some other regions. Net revenue at Rs1,788 crore during December grew marginally on a y-o-y basis.

Despatches in the December quarter grew 4% y-o-y, but inadequate pricing edge led to lower realizations at around Rs3,590 per tonne. Further, Ambuja Cements’ full-year realization per tonne at around Rs3,700 was 2% lower than the previous year. The pressure on profit margins can be seen through the contiguous fall in OPM, from about 32% in the March quarter to the present 18% in December quarter. The company counts its year from January.

Ambuja Cements’ reported net profit grew 4.6% y-o-y to Rs251 crore, which includes Rs37.1 crore credit from tax expenses pertaining to prior years. If adjusted, the net profit contracted by around 11% y-o-y. For the full year, the net profit was 4% higher than the previous year at Rs1,263 crore.

Some analysts say the sector has hit the bottom and the situation could not worsen further. Perhaps that’s why Ambuja Cements’ shares jumped by 3% to Rs125.50.

Ambuja Cements, which produces 25 million tonnes (mt) of cement a year, will increase production by 2 mt during 2011. The firm could save on costs going forward due to higher clinker capacity and wind power. Yet, “while power and fuel costs could be range bound, the demand-supply imbalance will keep cement prices volatile, in addition to subdued demand expansion in the near term”, said Ajay Parmar, head (research) at Emkay Global Financial Services Ltd.