Ambuja Cements: Hold

Trading at just 10 times its trailing earnings, the stock of Ambuja Cements, at Rs 91, promises upside backed by savings on coal cost, clinker capacity expansion and ramp-up in power generation. The company is enhancing its clinker capacity by 4.4 million tonnes and raising its power generation capacity by 75 mega watts (MW) before end of this year.

Ambuja Cements’ enterprise value per tonne is Rs 7,040 per tonne, nearly half of what it was in end-December 2007 (a little higher compared to ACC). Investors can hold the stock and look to accumulating it on broad market declines.

Ambuja Cements has five cement plants, six grinding stations and three bulk cement terminals across the country. The Holcim group (Swiss cement major) has a 45.67 per stake in the company. The same group has a significant stake in ACC too, suggesting scope for consolidation of capacity within the group.
Promising demand

Ambuja Cements is a pan-India player with major shares in the North and Western markets. The West, which has seen a 5 per cent growth in demand in the January-April period of 2009, looks promising with the pace of new investments in Gujarat set to accelerate. This region is also likely to see the lowest new capacity additions this year, suggesting a lower supply overhang.

The company has also seen good growth in the Northern market where despatches have posted a strong 15 per cent growth in the period January-April 2009, following higher infrastructure spending by the government.

To cater to the domestic demand, which has been gathering speed in the coastal markets of Gujarat and Maharashtra, through the sea route, the company is adding three ships to its existing fleet of seven this year. Ambuja Cements’ cumulative despatches for the year-to-date were at 66.38 lakh tonnes, higher by 6.5 per cent over the previous year. Despatches in May were at 16.38 lakh tonnes, higher over the previous year by 8 per cent.
Capacity expansion

Ambuja Cements’ current capacity is 20 million tpa. The company is commissioning two new grinding units of capacity 1.5 million tonne each at Dadri, Uttar Pradesh and Nalgarh, Himachal Pradesh before end of the first quarter of 2010. Further, to stop relying on clinker imports (as also to curtail costs), Ambuja Cements is expanding its clinker production capacity. At Bhatapara, Chattisgarh and Rauri in Himachal Pradesh the company is setting up two new clinker units of 2.2 million tonne capacity each. These units are expected to commission production by end 2009.

With cash and cash equivalents standing at Rs 643 crore as of end-December 2008, a modest debt:equity ratio and the core business growing strongly, funding of the capex may not pose a major challenge for the company.
Cost Savings

Expensive imported coal and high-cost power sourced from the grid have been eating into the company’s margins until the March quarter. But now it appears that there will be respite for the company, with coal prices cooling off in the international markets and the company also enhancing is its captive power capacity.

Though coal prices had corrected way back in January, cost savings for the company did not materialise in the March’09 quarter as the company still held high-cost inventory of coal. Cost-savings on coal can thus be expected to reflect from the current quarter.

The company is also expanding its captive power capacity. With the addition of an 18.7 MW plant at Rabriyawas plant in Rajasthan, the company’s total captive power capacity rose to 300 MW in 2008. In the March’09 quarter the company added another 15 MW power unit at Bhatapara plant. With this the company has already set work to raise its power capacity to 390 MW by end this year.
Margins can rise again

Ambuja Cements, which reported an operating margin of 53 per cent in 2007, has seen its margins slide significantly in 2008 not withstanding the rise in raw material prices and of fuel and power. Sales grew 10 per cent in 2008 while expenses expanded 24 per cent, pushing margins down to 36 per cent, on a par with the larger players in India. There have been some conscious efforts to curtail expenses and improve efficiency in recent months.

The company’s clinker capacity expansion will moderate the cost of importing clinker. The impact of the clinker import on the company’s operating margins in 2008 was approximately two percentage points according to the company.

The company is looking at options of acquiring coal blocks for captive mining and also considering alternative fuels to fire its plants. Efforts to lower power consumption and the dependence on grid may also help reduce costs.

via BL