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Gujarat Ambuja: Above all else

Aug 11, 2003

If the mood in the stock markets is any indication, cement stocks are finding takers even at the current levels. In this article, we will try to analyse strengths, weaknesses and the future growth prospects of Gujarat Ambuja.Gujarat Ambuja is the third largest player in the Indian cement industry with a total capacity of 12.5 MT (10% of total capacity). The company has a significant presence in the western, northern and eastern markets.

STRENGTHS

  • The company has an excellent track record of outperforming the industry due to its foresightedness. Being a late entrant into the cement business, the management of the company was quite clear that in order to compete with the depreciated plants of its major competitors, it will have to make its operations highly cost efficient. The efforts have paid rich dividends over the years and as a result, the company enjoys the status of being the lowest cost producer of cement in the world. Not only this, the company currently operates at operating margins (30% in FY03) which are almost double the industry average.


    * Gujarat Ambuja is June ending

  • The management of the company is believed to be the best in the industry and has time and again proven its credentials. It has been innovative by transporting cement through ships that has proved to be a competitive advantage compared to its peers in the domestic market. When compared to other cement majors in the country like L&T, Grasim and ACC, Gujarat Ambuja has stuck to its core competence of manufacturing cement. This highlights the focus as well.

  • The company acquired a 15% stake in ACC, which is the second largest player in the sector (12% of capacity). The management has shown interest in increasing stake in ACC further to fully utilise synergies between both the majors. ACC’s operating margins have already improved significantly in the last three years. If the company were to increase its stake in ACC, ACC’s pan-Indian presence and Ambuja’s expertise in manufacturing cement efficiently will create a win-win situation in the long-term.

  • Barring short-term increase in industry capacity, Gujarat Ambuja’s presence in the ‘less-fragmented’ eastern and northern markets offers the pricing advantage as well. With industry moving towards a more favorable demand-supply situation in the long-term, the company is likely to benefit.

WEAKNESSES

  • The caveat to hiking stake in ACC is that Gujarat Ambuja will have to shell out in excess of Rs 10 bn to have a management control. This could adversely impact the balance sheet of the company. The company would be in the position to unlock value in ACC if it can increase its stake. This increases the risk profile of the stock.

  • On a more short-term note, cement prices have weakened in the western markets due to new capacity expansion.

The stock is currently trading at Rs 232 implying a P/E multiple of 16x annualised FY03 earnings. The industry scenario is looking good. The sector has grown consistently at over 9% in the past decade and the trend in expected to continue in the next five years. Strong demand from infrastructure and housing sector form the basic premise of such healthy projections. Given this backdrop, the outperformance over the years by Gujarat Ambuja that we had mentioned earlier in this article is likely to continue in the future. But it is a matter of looking beyond one or two years.

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