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Gujarat Ambuja: Concerns ahead

May 2, 2002

Gujarat Ambuja (GACL) has managed to outperform the cement industry again. The company has posted a 15.3% growth in the topline in the first 9 months of FY02 (June year ending) compared to an industry growth figure of 14.5% in the corresponding period. Rise in revenues follows a similar trend in the previous years too.

The cement industry has shown robust growth in demand. The cement demand in the country has grown by nearly 9% in FY02. This strong growth has been on account of the increased infrastructure spending by the government, the Gujarat rehabilitation project and improved demand for housing units. Though GACL has outperformed the industry marginally, its performance is not exceptional.

FY01 was a much better year compared to FY02, in terms of beating industry standards. The company managed an 11% growth in topline in FY01 when the industry registered a de growth of 2%. GACL’s FY02 performance indicates that the cement industry has become highly competitive due to increased consolidation.

Though FY02 revenue growth figure seems to be encouraging, it has come at a price this time around. The realisations have reduced by nearly 4% YoY in the 9 month period. In the third quarter also the drop in realisations has been significant at 13.7% YoY. The high topline growth figures have been maintained due to the conscious strategy followed by the GACL-ACC combine. Both the companies resorted to capacity additions in line with the strategy to increase market share across the country.

Low realisations have affected the operating margins. The operating margins stood at 32.8% in the first nine months compared to 35.3% in the corresponding period last fiscal. Clinker procurement for the new plant led to high raw material expenditure growth. This also depressed margins. In spite of the increased expenditure, the fall in operating margins has been checked due to higher productivity and increased operational efficiency.

Optimistic demand forecasts have prompted cement producers to increase capacities considerably with companies like Grasim and L&T following GACL and ACC. The increased capacities and strong builder lobbies have adversely affected the realisations of these cement producers. There is a huge demand supply mismatch prevailing in the industry currently. What is worrying is that while the production has increased by nearly 9% in FY02 the cement capacity has increased by nearly 15%.

Going forward, while it seems that GACL may be able to maintain its topline, its operating margins and consequently its bottomline may come under increasing pressure due to low realisations and increased competition. On GACL’s part, a capital expenditure of Rs 400 m has been allocated in order to increase the capacity at its Chandrapur plant. While this may be the only capital expenditure by GACL for the next two years, indiscriminate capacity expansion by competitors is likely to have an adverse impact on its future earnings.

Increased focus on operational efficiencies and aggressive promotion of its cement brand is likely to be the focus for the company in the future, but it must be kept in mind that this focus has to be maintained in the face of increased competition.

At Rs 198 the scrip is trading on a multiple of 13.2x 9mFY02 annualised earnings.


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