According to newspaper reports, Gujarat Ambuja Cements Limited (GACL) has stated that its market share has improved significantly after the acquisition of DLF Cements and the strategic alliance with Associated Cement Companies Limited (ACC).
ACC is India's second largest cement company with a capacity of 11.6 m tonnes per annum. The company commands an 11.5% stake in the Indian cement market.
GACL is the largest manufacturer of cement in Gujarat and Punjab. It is India's most efficient cement manufacturer due to high degree of mechanisation in its products and mining activities. It has controlled freight costs by moving bulk of its production through the sea route.
The company has stated that the combined capacity of the three companies would jump to 29 million tonnes, with GACL alone contributing 16.5 million tonnes. It is apparent from this that there would only be a marginal expansion of capacity at both ACC and DLF in the coming three years. The focus, especially in ACC, is likely to be on improving efficiency and profitability rather than expanding capacity.
After the acquisition/deal, the combine now has a significant presence across the country. This would give the 'alliance' pricing power (due to larger capacitates) and thus enable it to post better margins. However, the cost synergies would be exploited only when the operations (for example sales and distribution) of the three companies are merged. This would also save on administration costs.
In a commodity business like cement, profitability is largely dependent on costs of production, as prices are market determined. GACL is one of the lowest cost producers of cement in Asia. This has enabled the company to consistently post above industry average operating margins. ACC and DLF on the other hand are way behind on this parameter. It is expected that both these companies will benefit as a result of their association with GACL. Coupled with the large volumes, better pricing power and cost control the companies would be in a position to dramatically improve their profitability (vis a vis the industry).
The fact that GACL is India's most efficient producer of cement has led the analyst to rate the stock as a 'BUY'. The management quality of the company is considered to be another factor in favour of the company.
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