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Cement: ACC vs. Guj. Ambuja - Views on News from Equitymaster
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Cement: ACC vs. Guj. Ambuja
Dec 8, 2006

Cement being a capital-intensive industry requires huge investments for expansion and modernization of plants. Moreover, being a cyclical industry, its cash flows are also not consistent, and companies need to raise funds to meet their capital expenditure requirements. It thus goes without saying that emerging as the largest players in the sector calls for extended capacities and operating efficiency. In this article we take a closer look at two of the largest players in the Indian cement sector. Capacity and capacity utilisation: Companies like Gujarat Ambuja (GACL) and ACC have large cement plants spread across the country due to which they can cater to cement demand across the country.

Particulars ACC* Gujarat Ambuja**
Capacity (MT) 18.3 13.3
Capacity Utilisation (%) 71.0% 96.3%
* 9mths ended CY05
**Gujarat Ambuja has changed its accounting year from financial to calendar year. The data mentioned in the above tables pertains to FY03, FY04 and FY05.

As is evident from the table above, Gujarat Ambuja, despite having lower capacity as compared to ACC, fares better due to higher utilisation levels. GACL has historically enjoyed atleast 1000 basis points (10%) premium over ACC in terms of EBITDA margins due to its higher utilisation levels. GACL’s higher EBIDTA margins can partly be attributed to the fact that the company enjoys higher pricing power and recall value of its products.

Operating efficiency: Though large capacities help, operating efficiencies decide whether the business is viable in the long run. GACL, widely considered as the most efficient and least cost producer owing to its highest margins (OPM), has witnessed pressure of rising input costs in recent times. While the turnaround in ACC has helped the company improve its OPM to 15% from a dismal 7% few years ago. From the table below, its clear that size along with operational efficiency plays a key role.

Particulars ACC* Gujarat Ambuja**
Operating costs per tonne basis 1,684 1,773
EBITDA per tonne basis 339 641
EBITDA margin (%) 16.2% 26.4%
Net profit margin (%) 8.3% 16.8%
Total debt/Equity (x) 0.5 0.4
Interest coverage ratio (x) 7.4 7.7
RONW (%) 10.9% 19.5%
EV/Tonne (US$) 265 323
* 9mths ended CY05
**Gujarat Ambuja has changed its accounting year from financial to calendar year. The data mentioned in the above tables pertains to FY03, FY04 and FY05.

Power and freight costs: In case of ACC, transforming its plants to dry process of cement manufacturing along with high utilization levels (increased from 90.7% in FY04 to 91.2% FY05), have reduced power costs on per tonne basis from Rs 516 in FY04 to Rs 506 in FY05. On the other hand, GACL’s power and freight costs have gone up considerably over the last two years. Gujarat Ambuja operated at a relatively lower capacity utilisation on account of severe monsoons during the past two years, resulting into operational stoppages due to plant shut downs. In case of a commodity player, economies of scale matters and this seems to have surely hurt the company to some extent.

Leverage ratios: ACC was a highly leveraged company till 2001. After restructuring, (since FY02) the company’s performance improved and its debt to equity ratio pared down to 0.5 in CY05 from 1.4 in FY01. However, its peer GACL fares best on this parameter as it has the lowest D/E ratio. Lower D/E equity ratio reduces interest outgo costs that put pressure on net margins. ACC’s net margins were higher in CY05 on account of its extraordinary income (EOI). If EOI is excluded, then net the margins were 8% in CY05.

To conclude…
While GACL is widely recognised as the most efficient and lowest cost cement producer in the country, its ability to sustain efficiency levels and pricing power will decide its destiny. ACC has successfully turned around in the last couple of years. Also, a large reach and improving operating efficiency portrays encouraging prospects for the company. Thus, while it is difficult to choose the best amongst the two on fundamental operating parameters, what investors must keep in mind is the fact that long-term sustainability of their strengths and competence against global heavyweights will help the leader withstand the test of time!

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