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Cement stocks: Ambuja leads the way

Mar 26, 2001

Consider three companies that derive nearly all their revenues from cement Ė Gujarat Ambuja (GACM), ACC and Madras Cements (MDCM). A look at their valuations reflects a more rational side of the market. Given itís a commodity, profitability in the industry depends on the ability of producers to maximize productivity in order to control costs. Another ingredient to success is Ďeconomicí size. This means that the company should be of such size that economies of scale are maximized. The three companies that we look at reveal the extremes in each of these parameters.

Stock Price Rs 148.2 151.5 4,521.6
Net Sales Rs m 26,913.0 13,260.0 5,645.0
Operating Profit Rs m 2,826.0 4,575.0 1,439.0
Operating Profit Margin % 10.5% 34.5% 25.5%
Cement Capacity MMT 13.0 7.0 3.5
Market Cap Rs bn 25.3 22.3 5.4
Market Cap per tonne Rs 1,948.3 3,184.8 1,537.3
Price/sales x 0.9 1.7 1.0
Number of Employees* Nos 10,275 2,400 1,850
Net Sales per employee Rs 000 2,619.3 5,525.0 3,051.4
Net profit per employee Rs 000 15.8 837.5 234.1
All data for FY01E; Net profit excludes Extraordinary Items
Expected capacity as in March'01
* Number of employees as on 31st March 2000

Letís take ACC, which is synonymous with cement in the country. The company has some core strengths. First, it has a national presence, with plants spread over as many as 11 locations across the country. This has several benefits like a hedge against slower demand in a regional market. Second, ACC has a capacity in excess of 15 million tonnes, enabling it to benefit from economies. However, the company, which was an icon in the cement industry, posted a loss in FY00. This was largely due to the fact that the company was unable to cut costs even as product prices fell sharply.

GACM, on the other hand, is considered to be one of the most efficient cement companies in Asia. The company has off late turned on the heat by going on an expansion and acquisition spree. Its most celebrated, and later criticized, acquisition has been that of a 14.6% stake in ACC. The company continues to set the benchmarks as far as efficiency and productivity in the sector are concerned. Its plants are concentrated in the western markets.

MDCM, like GACM, is considered to be highly efficient. However, it has a relatively smaller size, and limited presence in the Southern region (which, by the way is also the most lucrative).

Now, letís look at the valuations. GACM, which commands the highest OPM and the best per employee numbers, comes on tops as far as valuations are considered. MDCM, which follows GACM on efficiency parameters, comes in second. ACC commands the lowest valuation among the three companies, in line with its low levels of profitability.

However, if investing were so easy, then we would all just buy GACM or MDCM and hope to beat the market. These companies have probably squeezed out quite a bit of the inefficiencies in the system. So, gains in the future are likely to be limited.

The dark horse here could be ACC. The company is on a cost reduction spree. Indeed, the 10.5% OPM projected for FY01E is much higher than the 7.1% recorded in FY00. And the gains only seem to be increasing. The company is also taking several other steps to boost margins. These include setting up of captive plants to reduce dependency on erratic and costly state power. Add to that the inputs from the Ambuja management (remember GACM now holds a 14.6% stake in ACC), and ACC could greatly benefit in coming years. But (thereís always a but), there's always a risk that the company may not be able to achieve the much-anticipated jump in operating margins. But then, who said that investing in stocks is risk free!

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