Ambuja Cements feels heat of cost inflation higher than competitors

On a per ton basis, compounded costs increased 9% sequentially and 7% year-on-year ₹4,087 in Q3CY21. Analysts say this is a higher than expected 3-4% increase in operating costs. Ambuja treats the calendar year as a fiscal year.

Variable cost of production increased by more than 10% both sequentially and annually. Higher advertising spend, packaging costs, and travel expenses translated into increased other expenses. Analysts also say that since the company has only one month’s inventory day, the impact of spot cost of fuel is much higher for Ambuja compared to peers.

“Looking at the trend of the sector, Ambuja saw cost headwinds, especially in power and fuel and freight expenses. This led to reduction in Ebitda irrespective of line volume and unit realization. Unit margin declined to Rs 1,130 per tonne. Despite seasonal weakness, the fall in prices was limited due to better revenue share of value-added products,” said analysts at Jefferies India Pvt Ltd in a report. Volumes grew 9% with a small contribution from additional clinker sales .

As a result, standalone operating margin fell to 21.7% in the September quarter from 28.5% in the June quarter. There was some respite from better-than-expected growth in cement receipts, which partially offset the impact of higher operating expenses.

Analysts noted that the company’s realizations benefited from a change in market mix, which now favored better priced markets in the north and central and lower selling in the eastern market, which is dealing with an oversupply situation. Hence, on a sequential basis, the decline in realization for Ambuja was lower as compared to ACC Ltd and UltraTech Cement Ltd. The company’s sales mix of 40-45% in the North and Central regions increased nearly 50% during the quarter, while the Eastern mix fell from 25% to 20%. As far as West and South sales mix is ​​concerned, it was steady at 30%.

Nevertheless, in the backdrop of third quarter performance, several brokerage firms have cut the company’s operating growth projections for calendar years 2022 and 2023.

Meanwhile, during the September quarter, Ambuja commenced commercial production at its integrated plant in Marwar (Rajasthan) with clinker capacity of 3 million tonnes per annum (MTPA) and cement capacity of 1.8 million tonnes per annum.

“Going forward, incremental capacity and peak utilization may offset cost inflation to some extent. But we remain wary of low growth in the medium term due to capacity constraints. Management of near-term growth with the commissioning of the Marwar Mundwa project Although the management has mentioned its plans to increase the capacity to 50mtpa, the execution will be critical,” analysts at JM Financial Institutional Equities said in a report.