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Consolidation is the name of the game - Views on News from Equitymaster
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  • Sep 2, 2000

    Consolidation is the name of the game

    Associated Cement Companies Limited (ACC) is one of India’s largest cement companies commanding a capacity of 12 million tonnes. Given the company’s inefficient processes, it did not come as a surprise when the company posted a loss for the financial year 2000. Nevertheless a big surprise awaited its shareholders. Gujarat Ambuja Cements Limited (Ambuja) entered into an agreement to purchase a 14.5 percent stake from the Tata Group, promoters of ACC, outbidding Lafarge.

    Ambuja, despite its relatively smaller size, is a pioneer in the sector. The company’s strengths lie in its highly rated management and this has helped the company become one of the most efficient producers of cement in the Asian region.

    The company’s acquisition binge does not end with ACC, for which it agreed to pay over Rs 9 bn. The company also acquired a 42 percent stake in the 1.5 million tonne capacity DLF Cement Limited for a consideration of Rs 1.3 billion. Both these deals catapulted the company from being a regional player to a national player. Infact the company is also to shortly launch its cement in the Sri Lankan market, which is dominated by international players.


    Ambuja has also stepped on the gas as far as capacity expansions are concerned. The company will be adding over 3.5 million tonnes of capacity over the next three years, taking the total to 8.5 million tonnes. Another 2 million tonnes is to be added under a subsidiary. The combination of acquisitions and expansion will make the company a dominant player in the domestic markets. This will go a long way in taking on international competition.

    The company’s acquisition of the stake in ACC has however come in for some questioning given the pricing of the deal. Ambuja had paid Rs 370 per share of ACC, the market price of which is currently ruling at Rs 120. Some reasoned that the deal was more of a way of keeping international competition out. Indeed its stock price too has corrected sharply to sub Rs 200 levels.

    The deal, if looked at in another way, makes a lot of business logic. ACC has the volumes, while Ambuja has the skills and experience to run plants efficiently. ACC, despite its efforts, has seen its profitability erode considerably. Ambuja on the other hand operates largely in the lucrative markets of Mumbai, Rajasthan and Gujarat. Together these companies would command large volumes, giving them pricing power. And with help from Ambuja, ACC's operations could become much more efficient, generating better margins. The markets however do not seem to place much faith in the deal.

    The company’s financial performance for financial year 2000 clearly brings to light the challenging environment facing the cement sector. The company managed to pull through with only a marginal decline in operating margins. However profits (before extraordinary items) continued to grow at a fast clip of 16 percent. This was largely due to a decline in interest expenditure. It recorded large extraordinary income during this period in view of certain restructuring exercise.

    (Rs m) FY99 FY00 Change
    Net Sales 10,580 11,170 5.6%
    Operating Profit (EBDIT) 3,820 3,980 4.2%
    Operating Profit Margin (%) 36.1% 35.6%
    Interest 1,080 990 -8.3%
    Depreciation 1,230 1,240 0.8%
    Profit before Tax 1,510 1,750 15.9%
    Other Adjustments (Net) 0 2,530
    Tax - -
    Profit after Tax/(Loss) 1,510 4,280 183.4%
    Net profit margin (%) 14.3% 15.7%
    Diluted Earnings per share 10.3 29.1 183.4%
    Diluted Earnings per share* 10.3 11.9 15.9%
    * excluding other adjustments

    In coming years the domestic cement sector holds much promise in terms of an improvement in operating environment. It is anticipated that after years of a supply glut demand will finally meet supply. Infact some estimate that there could actually be a supply deficit. This factor combined with the consolidation in the sector will benefit cement companies in terms of a better pricing environment.

    Ambuja is probably the best placed to capitalize on this emerging scenario. The company will be commissioning large capacities in coming years, when the sector scenario is much better. Also, its deals with ACC and DLF will give it size and a national presence. And finally, what will continue to give the company a competitive edge in the markets will be its unparalleled efficiency and productivity levels.



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    Aug 18, 2017 02:31 PM


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