Gujarat Ambuja Cements Limited is increasingly getting aggressive. Not content with its 8.5 million tonnes per annum cement capacity, it decided to have a go for ACC and ended up with a stake of 14.4% in the latter. The company has now firmed up plans to double existing capacity to 16 million tonnes.
Currently, Gujarat Ambuja, along with ACC, control around 20 million tonnes of cement capacity (19% of aggregate capacity). The company’s aggressive plans are probably aimed at protecting this market share in future, as international companies set up bases in India and step up volumes.
However, several issues need to be tackled here. First, setting up capacity of 7.5 million tones would require, by Gujarat Ambuja’s standard, Rs 2.5 bn per million tonne (significantly lower than industry average of Rs 3.5 bn per tonne). This would entail a maximum expenditure of Rs 14 bn, given that some of the capacity expansion may be brownfield in nature. Although the company plans to route a part of the expansion through its other group companies, it nevertheless will put pressure on the cash flows of the entire group. Not to forget, the company recently had to make a payout of Rs 10 bn to the Tata Group for its acquisition of the latter's stake in ACC.
Gujarat Ambuja is only one of a number of cement companies (domestic and international) that have lined up large expansion plans. When these capacities go on stream it is more likely than not that surplus capacity will be created (demand is anticipated to grow at an average rate of 8% per annum in the future). For Gujarat Ambuja, however, this may not be a cause for concern. This is largely due to the fact its low cost structure (lowest in India) gives it staying power. This was evident in the last economic downturn, when the company continued to better its performance even as other cement companies sunk in the red.
However, the issue of cash flows needs to be tackled. It is apparent that only a part of the funds requirement can be met from internal resources. The company has earlier indicated plans of going in for an international issue. But the alternative of equity dilution may not be viewed favorably given the sharp erosion in valuations over recent months. Higher leverage on the other hand would affect bottomline performance. Probably, the company, and the investors, would have to get accustomed to higher debt levels in coming years.
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