Ambuja Cements struggles under cost pressures

The Holcim group-owned cement company sold 5.8% more cement in the quarter than it did in the previous corresponding period. Exports went up by 44%, contributing to 0.28mn tonnes of the 5.1mn tonnes sold during the quarter.

It also managed to get better per unit realisations, about 5% on an average, helping sales grow by 11.7% to Rs 1847.6 crore. Ordinarily this should have been sufficient for a good showing on the bottom line front. But ACL’s cost metrics went out of hand during the quarter.
Raw material costs went up by about 20%. It had coal stockpiles that had been bought at higher prices earlier. That pushed up power and fuel prices for the company by about a third. Freight costs too went up by about 10%. The net result was a drop in operating margins by 250 basis points (100 basis points = 1%).
Other income during the quarter fell by 22.5%. ACL’s profit before tax growth was flat compared to the previous corresponding period. If we adjust for a reversal of employee benefits and exchange loss in the March’08 quarter, its PBT would decline by 4%.
The cost pressures will come down in the coming quarters as fuel prices have fallen across the board. Freight costs too will come down with time. The pricing environment seems favourable at the moment. ACL also purchased clinker to meet demand for cement (clinker is an intermediate product), which added to cost. This will not be needed once it commissions its own expansion projects in 2009 to add capacity to produce clinker by 4.4mn tonnes per annum. It will also add two grinding facilities of 1.5mn tonnes each to be commissioned in the second half of 2009 and in the first quarter of 2010.
The concern in the horizon for cement companies is a fall in prices because along with ACL, all leading players have expanded capacity. Since variable costs form a high component of cost, a small reduction in prices can have a significant effect on margins and profit growth. Large capacity expansions can have an adverse effect on results, but the cement industry is quite famous for ‘production discipline’. Keeping a hold on the amount of cement available in the market, partly aided by exports, helps keep prices up. There is no reason to believe why the situation will be any different when new capacities come on stream.

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