According to newspaper reports, Gujarat Ambuja Cements Limited (GACL) is setting up a 2 m tonnes per annum greenfield cement plant in Maharashtra. The project, which is expected to be operational within two years, is estimated to cost approximately Rs 5 bn. The company has also finalised plans to add another 3.5 m tonnes of capacity, by setting up of a new plant, bulk terminal and de-bottlenecking existing facilities. This is estimated to cost an additional Rs 6.16 bn.
GACL is the largest manufacturer of cement in Gujarat and Punjab. It has a total capacity of 5 m tonnes per annum spread over 4 manufacturing units. It is India's most efficient cement manufacturer due to high degree of mechanisation in its products and mining activities. It has controlled freight costs by to moving bulk of its production through the sea route.
The company is spending Rs 1 bn to de-bottleneck its Ambujanagar plant to add another 1 m tonnes per annum capacity. It is setting up a bulk terminal and packaging facility (Rs 160 m) in Tamil Nadu to tap the southern markets. The company plans to supply cement to the bulk terminal from its jetties. Finally, plans to set up a 2 m tonnes per annum cement plant (Rs 5 bn) in Andhra Pradesh have also been finalised.
Gujarat Ambuja's aggressiveness in stepping up capacity is justified by the surge in cement demand. The Indian cement industry has been witnessing a strong surge in demand, coupled with firing up of prices. This is mainly due to the pick up in domestic demand and a likely narrowing of the demand supply gap over the next two years, as demand growth outstrips the growth in capacities.
The company's Maharashtra plant is situated near its mines, and this is likely to lead to substantial cost savings, as raw material will be sourced from the same. Also, as the plant is expected to go on stream within the next two years, the company would still be in a position to capitalise on the demand supply gap in the market. GACL's plans to de bottleneck capacity and also set up a base in the South will enable it to focus on the Southern markets, where price realisations are better than those prevailing in other parts of the country.
Although the step up in capacity seems justified given the demand scenario currently prevailing in the domestic markets, it is uncertain whether or not the same growth opportunities would exist say three years down the line. An adverse demand situation could leave the company grappling with large unutilised fresh capacities as well as declining realisations.
However, given the company's performance during the recent economic slowdown, it is unlikely that the company would be unable to find markets to sell its products. This is mainly due to its cost efficiencies that enable it to generate profits at price levels, at which competitors barely manage to keep their heads over water.
The fact that GACL is India's most efficient producer of cement has led the analyst to rate the stock as a 'BUY'. The management quality of the company is considered to be another factor in favour of the company.
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