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Ambuja Cement: Losing sheen

Jun 22, 2010

Ambuja Cements once was considered the most profitable player. The same now does not hold true. Profitability or the operating leverage is determined by two factors. One is manufacturing efficiency. The second factor is realisations or pricing power. In this article let's find out which factor impacted the company the most.

Shrinking margins: Ambuja Cements is the one who pioneered cement transportation through sea. It is a cost effective mode of transport. This way Ambuja Cements could contain cost of transportation. It has leveraged this mode of transport to export cement. It exports to Middle East countries. The export markets were witnessing growth in construction activity prior to economic slowdown. Hence, the demand for cement was robust. These markets were dependent on imports as supply fell short of demand. These conditions favoured exports. Ambuja Cements made the most of this opportunity. The realisations in export markets were higher to the extent of 30 to 50% compared to domestic markets.

Thus, it enjoyed higher margins. Domestically too itís a recognized brand catering to lucrative markets (western and northern region). In these regions supply fell short of demand. Shortage of supply resulted in higher cement prices in these regions. This situation was again in favour of Ambuja Cements. This was the state prior to the financial meltdown. The company enjoyed highest operating profit per tonne among companies under our coverage.

Post the onset of global financial meltdown demand from export regions slowed down. At the same time in the domestic market, housing prices touched the roof. The real estate players placed the blame on cement prices. Government banned exports to satisfy domestic demand. Cap on exports restricted growth in realisations.

While the government rolled back the duty on exports, demand from export region had dried up. This was on account of two reasons. One being the regions were still in recovery phase. Secondly the regions themselves had built up cement manufacturing capacities. Slowing demand and upcoming capacity depressed the need of imports. Thus, the export benefit for Ambuja Cements started to vanish.

Rising operational cost: At the same time, cost of operation was increasing. This was mainly on account of increase in variable cost. Higher crude prices resulted in an increase in fuel cost. Rising freight resulted in higher transportation cost. Since, the capacities were operating at optimum levels; there was no scope to reduce fixed cost. All of this had an impact on Ambuja Cements.

Thus, the company over the years has lost sheen as the most profitable cement manufacturer. This is also because of the industry nature. Technology is not a barrier. Dry cement process, captive power plants are the few initiatives which other players have also followed over the years. In the past we had communicated that Ambuja Cements is not the least cost producer. But then it was a profitable cement manufacturer. Now with increase in cost of operation, its EBITDA per tonne has also come down. And this has made the company lose its tag as a profitable cement manufacturer.


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