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Analyst Meet Note: Gujarat Ambuja Cements - Views on News from Equitymaster
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Analyst Meet Note: Gujarat Ambuja Cements
Aug 13, 2004

Growing in strength
In the analyst meet yesterday, Gujarat Ambuja shared its views on the cement sector - the strong growth prospects and how the company is among the best placed to capitalize on the long-term growth opportunity.

Demand - Clear visibility
  • In 1QFY05 (April to June 2004) - the industry grew by 2% YoY. The growth was dragged down to a sharp 11% volume decline in the Southern market. All other regions, particularly the north and west, registered growth. Excluding south, volumes in other regions grew by a respectable 7% YoY in 1QFY05.

  • Overall, demand is likely to grow at a multiple to GDP growth (in the last decade, the sector has grown by 1.2 times GDP growth). Despite the slow start to FY05, the outlook for the rest of the year looks promising. In July 2004, the industry reported record despatches of 10 MT, despite being a monsoon month, taking the cumulative industry YoY growth during April-July 2004 to over 5%. Cement demand is expected to grow by 6% in FY05, and expected to accelerate to 8% longer term.

  • The company is optimistic that the housing sector will continue to propel growth in the long-term, given the low mortgage penetration (estimated at around 2%) and increasing disposable income.

  • On the infrastructure side, the company does not expect anything substantial in the medium-term. In India, the contribution is 70:30 (i.e. 70% from housing and 30% from infrastructure). This is contrary to the situation in China, wherein the infrastructure segment contributes to 60% of cement usage with the rest coming from the housing sector.

  • Another recent growth opportunity for the sector and Gujarat Ambuja is the robust construction activity in the Middle East. Due to their proximity, Gujarat-based producers have a freight advantage to the Middle East, which is likely to result in sustained export growth in the future. In addition to a pick up in volumes, the export market has become even more remunerative - prices of both cement and clinker have risen almost 52% and 47% YoY respectively in 1QFY05. Export prices are expected to remain robust benefiting Gujarat Ambuja which exports 15% of its production.

Supply - Dynamics are changing
  • The Indian cement sector has a capacity of 144 MT and consumption was 117 MT in FY04 - the second largest in the world after China.

  • While demand has never been an issue (CAGR of 8% in the last decade), the industry's problems have been due to excessive supply with more than 70 MT of capacity added in the last ten years alone (effectively doubling of industry capacity). Part of this capacity expansion was also on account of fiscal incentives.

  • As per the information with Gujarat Ambuja no clinker capacity is likely in the next 24 months. As per the company, if cement demand increases by 6% in FY05 and 8% in 2006, demand and production will reach parity (equal) in FY05 and a shortfall in FY06.

Prices - Good times ahead
  • As mentioned earlier, with demand likely to exceed production, prices are likely to increase. Unlike the last decade, the medium-term outlook for prices is more favorable.

  • The table below gives a snapshot of prices across various states indicating that prices have been relatively firm in recent months in most markets, with the possibility of further improvement.

    Prices looking up...
    (Rs/bag) Dec-03 Jul-03 Jul-04 % change*
    Hyderabad 135 98 125 27.6%
    Ahmedabad 131 119 146 22.7%
    Delhi 129 109 133 22.0%
    Jaipur 122 115 140 21.7%
    Mumbai 163 143 162 13.3%
    Kolkata 165 162 175 8.0%
    Chennai 160 160 155 -3.1%
    *July 04 upon July 03, Source: Company

Gujarat Ambuja - Most favorably placed
  • Well spread: 90% of despatches of Gujarat Ambuja are on the retail side, where prices are higher as compared to the wholesale market. This has been one of the reasons why the company enjoyed better margins than its peers. Also, 85% of cement sold by the company is in the Northern and Western market, where the pricing situation is likely to be more favorable than the rest of the regions.

  • The lowest cost producer: The direct cost of production for the company in FY04 was Rs 610 per tonne (US$ 13 per tonne), which is among the lowest in the world. As a result, operating profit per tonne is higher than its peers. To put things in perspective, operating profit per tonne of cement sold for Gujarat Ambuja stood at Rs 744 in 1QFY05 as compared to Rs 539 per tonne for Grasim, Rs 273 per tonne for Ultra Tech and Rs 519 per tonne in ACC.

  • Low cost expansion plans: Through de-bottlenecking and possible acquisitions, the company hopes to increase capacity in the next three years to 20 MT from 14.8 MT currently. The expansion is likely to be funded from internal accruals. Balance sheet constraints were limiting the company's ability to invest in capacity, which we believe has changed for the better. Post the FCCB issue (convertible bond), the company is in a much better shape to acquire/invest in capacities.

Valuations
The stock currently trades at Rs 310, implying a price to earning multiple of 16.5 times FY04 earnings. We had recommended the stock at Rs 310 in April 2004 and post this analyst meet, we believe that the long-term prospects continue to remain promising and Gujarat Ambuja, as a low cost producer with a strong retail presence, is likely to reap the benefit of the same.

We re-iterate our Buy view on the stock.

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