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Ambuja Cements: Research meet extracts
Dec 22, 2008

Growth of the cement sector is linked to economic growth. On account of the global economic slowdown domestic economic growth has tapered down. Lack of credit has to some extent impacted the burgeoning infrastructural activity and real estate sector projects. These sectors are the end user industries of cement. Slowdown in these sectors in turn results in lower off take of cement and hence impacts growth of the cement sector. Thus, in order to understand the prospects of the Indian cement sector in general against the backdrop of economic slowdown and the company’s strategy to withstand competition and its expansion plans in particular, we recently met the management of Ambuja Cements. Here are the extracts of the meeting.

Expansion plans: The company has lined up huge capex of Rs 35 bn. Out of the total capital expenditure outlined, Rs 26 bn would be utilised to set up grinding and clinker units to augment capacity from 18.5 MTPA to 24 MTPA by CY10. The company has also planned to set up a cement bulk terminal to reduce costs and to ensure effective and timely shipments. The terminal that would cost Rs 660 m will help the company to capitalize on growth opportunities available in the Southern region. The rising fuel cost has increased power costs. Even though the company managed to reduce power consumption, increase in average cost of power generation exerts pressure on margins. Thus, to restrict increase in cost of operation, the company has planned to set up 178 MW of captive power plants at an investment of Rs 5.45 bn. Ambuja Cements pioneered the concept of dispatching cement through sea transportation. In order to lower costs and cater to increasing demand for cement (from a long term perspective) in the domestic and export markets, the company has decided to expand fleet capacity.

Funding: The company’s debt equity ratio stood at 0.7 as on year ended December, 2007. The company plans to fund its expansion plans mainly through internal accruals. As the company has sufficient funds in place, we do not foresee any need to raise gearing in the medium term. The expansion plans are progressing as per schedule and are expected to go on stream by CY10.

The way forward: During 9mCY08, the company reported 10.9% YoY growth in revenues on account of higher volumes and firm realisations. As the sector growth has slowed and fresh capacities are exerting downward pressure on prices, we expect the company to end the year with single digit growth in topline. On the bottomline front, we expect the company to report a declining trend on account of lower realisations and increased cost of operation. Further, economic slowdown has arrested growth in volumes. Moreover, the industry has lined up huge capacity expansion plans, which once operational, are likely to result in excess supply. The supply glut situation will exert downward pressure on realisations in turn impacting margins of the company. The industry growth has slowed down to 7% and is expected to grow at lower pace in near to medium term. The company expects to grow in line with the industry.

  • Read – Ambuja Cements 3QCY08 performance analysis

    The rationale behind these huge capex plans is to maintain market share, contain cost of operation by reducing power costs, transportation costs etc. The company uses all there modes of transport to dispatch the commodity. The company approximately transports 20% of goods through sea route and 40% each by rail and road. The increasing fleet size is in line with the company’s plans to lower freight costs and bring coastal markets of India within its reach. The move to set up captive power plants is likely to help the company to continue operating on 80% captive power basis. Further, the company being a part of the Holcim group can benefit from Holcim’s expertise in manufacturing cement. Holcim is very good in areas like technology, waste heat recovery systems and alternative fuels. Thus, the moves adopted by the company are likely to provide some cushion to the operating margins.

    What to expect?
    While the near to medium term growth prospects have been impacted by the economic slowdown, the long term growth story remains intact. This is mainly on account of government initiatives in the infrastructure and housing sectors that are likely to be the main drivers of growth for the industry in the long run. Further, the government’s recent moves such as infusing capital, lower interest rates for new home loan disbursals, plans to increase infrastructural funding etc., is expected to limit the impact of the slowdown. However, execution and implementation is the key.

    At the current price of Rs 71, the stock is fairly valued at around Rs 4,000 on an enterprise value per tonne (EV/tonne) basis as per our CY10 estimates.

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