• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

S. Vaidya Nathan

Sewing up ACC would place it on a scale with Grasim.

AN INVESTMENT can be considered in the stock of Gujarat Ambuja Cements. As cement prices show signs of remaining stable at higher levels compared to the past few years, the earnings growth is likely to be healthy. The availability of a new one-million-tonne capacity is likely to ensure volume growth over the next year and a half.

Efficiency continues to be its key strength; so is the ability to mobilise funds at attractive rates. The merger of Ambuja Cement Rajasthan (earlier DLF Cement) and the turnaround and impressive performance of Ambuja Cement Eastern (earlier Modi Cements) are also likely to pep the earnings card.

We remain bullish on the stock, which has been on our `buy' list from price levels of about Rs 140. Though returns may not be as attractive as they have been over the past 18 months, they are likely to be in the 15-20 per cent range.

Gujarat Ambuja and Grasim are likely to be the preferred plays in the cement sector. An enhanced level of institutional interest is likely in the cement sector stocks as the industry moves closer to a better balance between demand and supply. A fine balance in the northern market has already provided a leg up to cement prices; along with Shree Cement, Gujarat Ambuja would be a prime beneficiary as this region is its key market.

The risks to our recommendation are the sluggish volume growth, especially if it is accompanied by a weak trend in prices (which has not been the case for the past six months), and the possibility of a hostile bid for ACC in which Gujarat Ambuja has a strategic stake.

As much as its performance, its moves to pursue growth through acquisitions will be a key factor that would drive valuation. How it uses its financial strengths in the acquisition space will depend on the tack it adopts on the strategic alliance with ACC.

Gujarat Ambuja has had a hand on the controls of ACC with a stake of less than 15 per cent. ACC is still vulnerable to a hostile bid; we continue to hold the view that the Ambuja group has invested in ACC with the objective of consolidating its presence, and not to reap the benefits of exit at a higher price.

The emergence of Grasim as a player with twice Gujarat Ambuja's capacity levels and a wider geographic footprint also strengthens the view that the latter is unlikely to let go of ACC. Without the clout offered by ACC, Gujarat Ambuja would be hard-pressed to challenge Grasim. This is why it is likely to accord priority to consolidating its holding in ACC. If it makes any move to acquire other units with capacities of between two and four-million tonnes, it would need at least a couple of years to sort out the debt burden that would be accumulated. It would also run the risk of ACC being exposed to a hostile bid in the intervening period.

Over a four-year period, the Ambuja group has not shown an inclination to raise its stake to a level where it would enjoy unquestionable control. If it decides to consolidate its hold, an outlay in excess of Rs 1,800 crore would be required.

This would, however, be a long-term positive, as a firm hold on ACC would place it beyond the pale of a challenge by the MNCs. Sewing up the control over ACC will place Gujarat Ambuja in a position of comfort to pursue growth by setting new units after two or three years, when the demand-supply imbalance gets sorted out.

As producer pricing power is likely to improve, a presence at the top of the table with Grasim would facilitate scaling up of operations and lead to healthy earnings growth. Buy into this pure cement play with a two/three-year perspective; any sharp spike in price can be used to book profits, with re-entry at lower levels as an integral part of the investing strategy.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
FMCG stocks: No longer for defensive investors

Copyright © 2004, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line