Guj. Ambuja may sell its eastern cement plant - Views on News from Equitymaster

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Guj. Ambuja may sell its eastern cement plant

Mar 6, 2000

It has been reported that Gujarat Ambuja Cements Limited (GACL) may be looking at divesting its 93% stake in Ambuja Eastern Cement Limited, a company that it took over in 1997. The company has denied any such move. 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 has been on an acquisition spree of late during which it acquired stakes in DLF Cements and Associated Cement Companies (ACC). The company has been able to arrange funding for these deals mostly through borrowings. GACL has also planned a US$ 200 m issue to fund its expansion plans and also pare down its debt in the coming months.

The need for additional funding has arisen due to concerns that Sebi may rule that there has been a change in management at ACC, thus triggering the Takeover code. Under this, the company would have to make an open offer for another 20% stake in ACC at a price of not less that Rs 370 per share (the rate at which they bought out the Tata stake). This could put the company’s existing cash flows under sever constrain (the additional 20% would cost approximately Rs 12 bn).

The unconfirmed reports that the company may be looking at selling its subsidiary are based on this rationale. Although the company has denied such a move, there seems to be some logic to the reports.

After the acquisition of a stake in ACC, GACL has got a nation wide presence, including eastern India (ACC’s eastern presence is via two plants in West Bengal, one in Orissa and 2 in Madhya Pradesh). Therefore, the need to have another unit serve the eastern markets is diluted.

The decision if taken would be a step in the right direction for GACL, which is likely to face a tightening of liquidity in the coming months. However, one must not forget that a sellout may involve the entry of an international giant – Lafarge, Cemex or Holderbank. This could alter the competitive scenario in the East.

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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