According to newspaper reports, Gujarat Ambuja Cements Limited (GACL) has suggested some critical changes in Associated Cement Companies' (ACC) brownfield expansion plan to cut down costs by atleast 10%.
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. GACL holds a 7.2% stake in ACC, one of India's largest cement companies.
ACC is currently implementing a 2 MMT brown field expansion plan at Wadi (Andhra Pradesh). GACL has suggested some modifications that will bring down the cost to under Rs 5 bn as against the existing projection of over Rs 5.5 bn.
The expectation that GACL's excellent project management skills will benefit ACC is already evident. In a commodity business like cement, costs play a key role in determining profitability. While GACL is the most cost efficient producer in India, ACC is an industry laggard. This is further reflected in the large divergence in the operating margins of the two companies. A 10% reduction in capital costs can go a long way in making the company more competitive in the market in terms of cost efficiency.
However, GACL's interference in the management of the company (ACC) has already created concerns among financial institutions and the Sebi. The issue of change in management is once again likely to be raised in the coming days. In case this were to be held by the Sebi, GACL would have to make an open offer for a 20% stake in ACC that would approximately be worth Rs 6 bn at current market price. This could create cash flow concerns for GACL.
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.
LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.
SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India. Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407