Guj. Ambuja advises ACC on project cost cutting - Views on News from Equitymaster

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Guj. Ambuja advises ACC on project cost cutting

Feb 25, 2000

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.

Market View:
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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