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Leading the pack... - Views on News from Equitymaster
 
 
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  • Aug 28, 1999

    Leading the pack...

    More often than not, it is seen that cyclical movements in the economy lead performances of core sector companies. In India, over the past three years, as the economy, ran into rough weather, many Indian companies fell along the way. Yet, amongst the ruins, we can see one company that has managed to stand tall and consistently beat the odds. Gujarat Ambuja - India's fourth largest cement company has done all that and more.

    Today, Gujarat Ambuja has established itself amongst the most efficient cement producers not only in India, but across the world. The company, led by an inspiring and innovative management, was the first to use waterways as a means of transporting cement in India. It is accredited with being the first to brand its product and attempt to differentiate what is basically a commodity.

    Efficiency, thy name is Ambuja...
    Most companies in India - accustomed to the licence-raj environment, have failed to focus on cost controls and have found their margins shrink when business environments turned adverse. However this situation never arose in the case of GACL as it went ahead to control costs, with an unconcealed passion, both in good and the bad years.

    The company, today, derives its competitive advantage from a combination of factors such as favorable plant locations, use of waterways for transporting cement, low input costs and very efficient operations. Gujarat Ambuja partially insulated itself from price increases in administered costs (costs controlled by the government) by setting up a captive power plant. Today, it is not only self sufficient in its power requirement but its consumption levels per ton of cement are also lower. In financial year 1999, its power consumption was 98 kWh per ton of cement, against 105 kWh per ton in the previous year.

    The single-minded attitude towards cost control and efficiency has paid rich dividends to the company. For the year ended June 1999, Gujarat Ambuja sold 5.9 million metric tons of cement (an increase of 17 percent over the previous year). Net sales increased by 8.4 percent to Rs.10.7 bn and profit after tax grew by 14.3 percent to Rs.1.5 bn. Operating margins increased from 33.6 percent to 34.2 percent largely on account of reductions in fuel and power costs. The fact that the company was able to show profit growth in a year when cement prices declined by 5-6 percent speaks volumes about the management's ability to control costs. In financial year 1999 direct production costs declined by nearly 20 percent to $16-17 per ton.

        

    Be where it matters...
    GACL sells its cement in three main markets - north India (accounting for 42 percent of sales), Gujarat (37 percent) and Bombay (14 percent). Demand for cement in these markets is expected to grow at 10-12 percent, much higher than the national average of 7-8 percent.

    In its existing markets of Gujarat and Punjab (north India), Gujarat Ambuja commands a market share of 29 percent and 31 percent respectively. In order to expand its reach, the company recently acquired Modi Cement, which will enable it to tap the eastern markets - a region in which it has no presence. Apart from focusing on domestic markets, GACL exports cement to Sri Lanka, Mauritius, the Middle East and Singapore. Also, it has indicated its plans to set up a production base in Sri Lanka to take advantage of a better pricing environment compared to India.

    The company has not been a laggard where capacity expansion is concerned. Incorporated in 1981, Gujarat Ambuja commissioned its first cement plant (of 0.7 million tons per annum) in October 1986. Since then, it has expanded capacity at a compounded annual rate of 35 percent over the past 7 years. Currently it has a capacity of 5 million tons per annum, and also owns another 1.5 million tons through a subsidiary (acquired in 1998). Though the nameplate capacity is 5 million tons, it has a history of operating well above its stated capacities.

    The road ahead...
    Without resting on past laurels, the company plans to grow aggressively in future either through acquisitions or by building new plants.

    In the immediate future, it plans to set up two new cement plants of 2 million tons each to be commissioned over the next two- three years. The two plants costing around Rs 5 billion each are to be located at Maharashtra (Western India) and Andhra Pradesh (Southern India). The company is likely to go ahead with the southern plant first and the target completion date in middle of fiscal 2002. The funding for this capital expenditure will come from internal resources.

    In recent weeks the cement sector has been re-rated positively by analysts and fund managers. With its fundamentals in place, Gujarat Ambuja is well set to benefit from the recovery in the economy and the rise in cement prices.

     

     

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