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Gujarat Ambuja Vs Cemex - Views on News from Equitymaster
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  • Aug 21, 2003

    Gujarat Ambuja Vs Cemex

    With operating margins that are almost double the industry average and a dynamic and committed management at the helm, Gujarat Ambuja is more than a match for anyone in the Indian cement industry. But does it have enough fire power to hold its own against transnational giants like Lafarge and Cemex? In this article, we will compare Gujarat Ambuja with a transnational giant, Cemex.

    Gujarat Ambuja, with a capacity of 12.5 million tonnes (MT) is the third largest player in the Indian cement industry. Set up in 1986, the company is relatively new as compared to its peers in the domestic industry. However, the company’s products enjoy a premium in a commodity business like cement. Cemex, on the other hand, was set up way back in 1906 in Mexico and has grown from a small regional player into a top global cement company. With a capacity of 80 MT, it is the third largest player in the world and operates across four continents.

    Having gone through a brief snapshot, let us now see how these companies compare on different parameters such as cost efficiency, utilization of resources and valuations.

    Since we are comparing Gujarat Ambuja, which operates in a developing economy, with Cemex that has global presence, it is important to have a look at the market dynamics. Gujarat Ambuja is largely a domestic player and as of now has no major plans to target the overseas markets. Moreover, it operates in a market where prices are already one of the lowest in the world due to the chronic oversupply situations. As a result, competitors try to undercut prices to eliminate competition. The industry thus frequently suffers from lower price realisations. There are no such worries for Cemex, as it mostly operates in the developed countries where there is less pressure on prices. Cemex also has a strong brand equity that enables it to charge a premium.

    As far as operating margins are concerned, Gujarat Ambuja appears to be more competitive than its Mexican counterpart (as apparent from the graph above). Also in FY02, operating margins of Gujarat Ambuja were greater than the world average and also the Asia Pacific average. Although, Gujarat Ambuja is one of the lowest cost producers of cement in the world, it also gains from certain sales tax benefits in the state of Gujarat where it has its maximum capacity. Since we expect this benefit to peter out in the next three years, operating margins could stabilise at around 25% levels.

    What does this comparison with Cemex lead to?

    • Demand:  India is the second largest consumer of cement in the world and growing at around 8% per annum. Given the country’s poor road, airport, ports and irrigation infrastructure, we expect demand to grow at similar rate in the future as well. On the other hand, Cemex expects demand to grow by around 4%-5% in the coming year. Growth for Cemex is likely to come from acquisitions and concentrating on developing regions like East Asia.

    • Price scenario:  Prices of cement per tonne in Canada are US$ 150 as compared to just about US$ 50 in India (world average is estimated at US$ 70 per tonne). Therefore, the scope for price appreciation in the long-term remains promising. With capacity growing at a slower rate compared to consumption, the excess capacity that is impacting prices currently is likely to shift favorably.

    • Competition:  Most of the global majors like Cemex, HolderBank and Lafarge are expected to focus on emerging markets for growth. This could increase competition in the future. Cemex has acquired significant capacities in countries like Thailand, Malaysia and Philippines.

    Comparative Performance**
      Units Gujarat Ambuja Cemex
    Capacity (MT) 12.5 80.0
    Net Sales (US$ m) 379 6,543
    Sales CAGR (3 yrs) (%) 18.0% 11.0%
    Operating Ratios
    EBIDTA (%) 27.5% 20.0%
    Net profit margin (%) 12.8% 8.0%
    Return Ratios
    RONW (%) 14.0% 9.0%
    ROA (%) 4.0% 6.0%
    ROIC (%) 9.0% 15.0%
    Price (Rs)* 231 24
    Mkt.cap/sales (x) 2.1 1.2
    P/E (x) 16.2 10.0
    EV/tonne (US$) 86.0 172.0
    *Cemex stock price in US$
    **2003 numbers (except return ratios of GACM)

    As far as valuations are concerned, Gujarat Ambuja trades at a higher valuation when compared to Cemex based on FY03 earnings (12.5x FY04E earnings). This could be due to higher earnings prospects in the domestic market.



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