Gujarat Ambuja, with a total consolidated capacity of 14 million tonnes (MT), is the third largest cement producer in the country. It has close to 9% of the country's total cement capacity and has the western and northern regions as its principal markets. The company has been considered the lowest-cost producer of cement in the country. However, things have changed in the past. In this article, we analyse the company's performance in relation to its peers.
Really the lowest cost producer?
GACL has been widely considered as the lowest cost producer of cement in the country. While this was true till a couple of years back, things have changed since then. And this has been mainly due to rising power cost for the company. These costs, which were 22.8% of sales in FY04, increased to 24.3% in FY05. During the same period, the company's closest peer, ACC saw its power costs decline from 23% to less than 20%. Overall, on a per ton basis, GACL produces cement at Rs 1,773, which is 3% and 16% higher than the per ton cost of production for ACC and Madras Cements (see table below). Higher cost per ton for GACL has also been a result of rising employee and freight costs.
Cost/ton produced (Rs)
Net avg. realisation (Rs/ton sold)
Now, while GACL lags its peers in terms on the cost front, better realisation owing to pricing power in its regions of operation has helped the company rake in a superior profitability performance. Its EBIDTA per ton was Rs 641 in FY05, compared to Rs 413 for ACC and Rs 408 for Madras Cements. Improvement in productivity and efficiencies of the operations coupled with better selling prices in domestic as well as export markets have helped GACL achieve highest net avg. realisation per ton as compared to its peers.
The company has been able to maintain prices and retain its premium in the Gujarat market largely due to the cushion provided by exports. Gujarat Ambuja currently sells 15% of its production in the export market and uses sea transportation (the cheapest mode of transportation) for 35% of export sales. Rising demand for cement and demand supply mismatch has helped the company realise superior prices in the international markets.
At the current price of Rs 118, the stock is trading at EV/ton of US$ 255, which makes it a very expensive proposition even for long term investors. While the merger with Ambuja Cement Eastern will provide the company with a presence in the Eastern markets of India and synergies with Holcim will benefit it in the long term, we believe that growth is already factored in the stock price and, thus, would recommend investors to practice caution.
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