Ambuja Cements: Set to grow

Investors with a three to five-year perspective can buy the stock of Ambuja Cements. With the cement capex cycle almost over, the company is expected to benefit from improvement in offtake for cement, going forward. Moreover, its higher exposure to the central and northern markets gives it a relative edge; the demand and pricing dynamics are better in these regions.

At ₹203, the stock is down 17 per cent over the last one month. Its enterprise value per tonne ($158) is close to its replacement value. The market leader UltraTech quotes at a 26 per cent premium; at $200 per tonne.

Ambuja Cements has manufacturing capacity of about 32 million tonnes (mt) — making it the third largest cement player after UltraTech and ACC. About 25 per cent of its revenue is from the North, while the Central market accounts for another 23 per cent, higher than other national players. It has plans to ramp up its existing capacity by another 11 mt by 2020 — mostly in Rajasthan.

The company’s capacity utilisation is at 73 per cent, better than the industry average of 66 per cent. UltraTech and ACC have slightly higher capacity utilisation of 77 per cent. But, unlike others, Ambuja Cements does not have exposure to the southern markets – which have the lowest capacity utilisation levels.

With capacity addition almost complete for the cement industry, capacity utilisation has bottomed out. Any pick-up in volume growth is expected to boost the company’s profitability. About 80-90 per cent capacity utilisation is a possibility over the next three to five years.

The company’s standalone sales were up 1 per cent to ₹4,959 crore for the six months ended June 2016, while its net profit was up 29 per cent to ₹703 crore. The company has been bearing the brunt of price competition from smaller players, which have been taking away market share from larger players.

This has been true for other national players also. As per the management, the company’s efforts to maintain prices had an impact on its sales. However, fall in fuel costs helped improve its profitability. Sales volume during the September 2016 quarter was down 6.6 per cent Y-o-Y to 4.5 million tonnes. While the monsoon reduced overall volumes for the industry, Ambuja Cements also continued to lose market share.

However, since the start of this year, cement prices have been edging up in the northern, central and western markets. Moreover, with UltraTech buying Jaiprakash Associates’ cement business in the central region, pricing discipline is expected to get better.

Ambuja Cements’ consolidated net profit was up 40 per cent to ₹216 crore in the September quarter. However, the figures are not comparable because of the amalgamation of Holcim with the company, which resulted in an extraordinary dividend income of ₹103 crore during the quarter.

Ambuja Cements’ cost per tonne was ₹3,659 in the four quarters ended March 2016, lower than that of UltraTech and ACC, whose costs were above ₹4,000 per tonne. Ambuja Cements has no debt, a plus compared with regional players.

While the recent demonetisation move could reduce real estate-driven demand for cement and temporarily impact economic growth, pick-up in demand for rural homes and the Centre’s infrastructure thrust should eventually improve cement offtake.