A Stronger Bond With Ambuja May Turn Profitable

“Iss cement mein jaan hai” the tag has earned a great recognition to the company both in monetary and goodwill terms. Ambuja Cements Limited, formerly known as Gujarat Ambuja Cement Limited, is a major cement producing company in India. The company is promoted by LafargeHolcim, headquartered at Jona, Switzerland and one of the largest suppliers of cement in the world. LafargeHolcim has its presence in 90 countries with over 115000 employees.

As of March 2016, Holcim holds 51.04 per cent stake in Ambuja Cements through its Indian arm Holcim Indian Pvt. Ltd. (9.86 per cent) and its subsidiary Holderind Investments Ltd. (41.19 per cent). Other than this the total FPI holding in the company as of March 2016 is 24.02 per cent. Other major holder is LIC with 8.6 per cent holding.

Recently, during April 2016 Lafarge-Holcim merger hit Competition Appellate Tribunal blow after CCI had already approved the merger in March 2015. Thereby Lafarge was not able to sell its plants after Mines and Minerals Development and Regulation Amendment Act barred the transfer of Limestone mines attached with cement plants.

According to Indian Brand Equity Foundation, Ambuja Cements in itself is the second largest cement manufacturer in India and has nearly 10 per cent market share in its total installed capacity. It is the market leader in northern India with a share capital of 29 per cent as compared to total installed capacity.

There is no threat of the new entrant to the company. Entry into the industry is quite rigid and requires heavy capital investment. In the year 2013 there were approximately 210 companies operating in the cement business. The number became 186 in 2014 and in the year 2015 only 90 companies are operational. From the year 2013 to 2015 the number of companies operating in the industry has reduced by 57 per cent.

The only name comes as close substitute to the company is fly ash.  Fly ash is a residual product produced in combustion of coal and comprises of fine particles. Fly ash is a by-product from the thermal power plants. It is a waste product and has no other use in power plants. However, the main drawback lies in its quality. Over the period of time, the quality of Fly Ash reduces and therefore it is not widely recommended and used and hence there is no threat of a potential substitute to Ambuja Cement.

Bargaining power of the buyers is low as the majority of the buyers are bulk buyers like big construction firms, corporate etc. The power of the consumer is limited due to lack of substitute in the market. As on June 14, 2016 the prices of Cement are in the range of Rs 275 to Rs 290 per bag of Rs 50 kg each, where the cost of Ambuja Cement is Rs 283 per bag which is of 50 kg, in Mumbai.        

Bargaining power of suppliers    

The supplier has a great amount of bargaining power as the can bring the production of the company to a standstill. Shortage in supply of raw materials can cripple the whole plant and can lead to huge losses. But since all the raw materials are natural resources, they are under the government’s control.

There is immense industry rivalry in this sector. Capital invested by the company is used to set up the production plant, as the number of players are limited which makes the industry more competitive. Also, the differentiation in types of cement is marginal, hence the switching cost to customers is not high, so firms compete intensely to gain market share. UltraTech Cement is the major rival and the market leader in the industry.

India is the second largest producer of cement in the world. No wonder, India's cement industry is a vital part for the economy; it provides employment to more than a million people, directly or indirectly. Ever since it was deregulated in 1982, the Indian cement industry has attracted huge investments, both from Indian as well as foreign investors. India has a lot of potential for development in the infrastructure and construction sector and the cement sector is expected to largely benefit from it. Some of the recent major government initiatives such as development of 98 smart cities are expected to provide a major boost to the sector.

However, despite 7 per cent plus growth in GDP, cement production has remained subdued and has seen a growth of 1-2 per cent as against 6 per cent in the previous year. The slowdown was in the wake of low demand from end-users and inefficient capacity utilisation.

Fly Ash: Ambuja has adopted Portland Pozolona Cement which uses fly ash which is a major replacement for natural limestone. Mixing Fly ash in adequate quantities has resulted in lesser power consumption and production cost. The company recently succeeded in saving Rs 10 crores p.a. at Ambujanagar unit.

The Paris Agreement: Recently during last six months the Paris agreement has been adopted by 196 countries wherein the cement sector is one of the biggest emitters of carbon accounting to 5 per cent of the total. In India out of 12 only 3 companies have significantly reduced carbon emissions.  Ambuja Cements is a part of Paris Agreement. The reduction of carbon emission would improve its sustainability footprint.

The production of the cement in 2015 increased by 0.5 per cent to 21.5 million tonnes while clinker production decreased by 3 per cent to 14.4 million tonnes. Despite of being a major player in cements Ambuja has been giving more or less consolidated results so far with no much ups and downs in the topline and bottomline. Moreover, the recent December 2015 numbers see a drastic downfall in the numbers.

The consolidated revenue from operations witnessed a drop of 5.2 per cent from Rs 9951.97 crores to Rs 9431.43 crores in CY15. Company saw a spurt in just other operating revenues from Rs 69.13 crores to Rs 93.34 crores in CY15 out of which majority was driven by written bank amount and miscellaneous income. Company’s overall direct costs remained in line with the previous year.

Within the direct costs power and fuel charges and freight and forwarding charges that account for nearly 50 per cent of the total direct costs each too remained in line wherein Fuel costs dropped while the freight charges offset it with the rise of more or less similar amount.

Amongst other expenses, Ambuja saw a rise in both interest and depreciation. Interest charges came in at Rs 92.47 crores from Rs 65.55 crores in the previous year, an increase of 41 per cent. The interest on income tax specifically the net of interest income on refund increased tremendously. Otherwise, Depreciation saw a rise to Rs 629.76 crores in CY15 from Rs 513.03 crores in CY14.

Meanwhile, the tax expenditure too rose more than 25 per cent to Rs 365.37 crores in CY15 from Rs 287.51 crores in CY14. Thereby the bottom line net profits dropped 46 per cent to Rs 807.88 crores in CY15 as against 1486.50 crores in CY14.

Dividend: The company has declared an interim dividend of Rs 1.6 per share i.e. at 80 per cent. However, as a result of a decrease in company’s PAT and provisions to conserve resources the company declared final dividend of 1.2 per share during February 2016 amounting to a total of Rs 2.8 per share. The total dividend pay-out including DDT was Rs 522.99 crores.

Debt/Networth: Despite of being a manufacturing company, Ambuja has been maintaining a negligible debt to networth ratio. The total debt for 2015 stood at Rs 35 crores.

Trade receivables: The trade receivables amounted to Rs 286.36 crore as against Rs 227.98 crores in the previous year. The company maintained a high receivables turnover ratio of 32.94. The company operates majorly on cash basis which indicates quality customers paying off debts timely.

Working capital: The company’s working capital has increased nearly 12 per cent from the previous year to Rs 1172.23 crores. However, the rise in current assets (less investments) is 48 per cent to Rs 4401.76 crores. This indicates a risk of liquidity.

ROE and ROCE: Company has maintained consistent ROE and ROCE except for the year 2015 when ROE dropped from 15.3 to 7.9 while ROCE dropped from 18.8 to 12.35.

Considering latest quarter results, Ambuja Cements’ standalone revenue for Q1CY16 stood at Rs 2418.30 which was in line with the same quarter of the previous year at Rs 2424.57 crore. EBITDA saw a drop of 11.8 per cent to Rs 449.82 crore from Rs 509.95 crore YoY. The drop in EBITDA was in the wake of an increase in freight and forwarding charges to Rs 696.73 crore from Rs 620.73 crore. Company’s PAT stood flat at Rs 303.76 crore as against Rs 317.69 crore during the corresponding quarter of the previous year. The uplift in the PAT was on the back of hike in other income specifically write back of provision for interest on income tax of previous years. The company’s diluted EPS stood at 1.96 as against 2.05 in Q1FY15. The quarter on quarter PAT saw an exceptional threefold rise with drop in other expenses.

Peer comparison:

In terms of dividend, Ambuja Cements maintains a higher dividend yield at 1.2 per cent as compared to its peers. It also has a higher P/E at 46.13 but lower than its major peers Shree Cements and ACC. Moreover, quarterly sales are in line with the peers while net profits are higher as compared to them after Ultratech Cements. Being a holder in ACC through Holcim, Ambuja includes the numbers of ACC.

 ·        The key concerns for the company have been the drop in demand for cement due to slowdown in rural development. However, Government support and policy initiatives may create the demand in the long run.

 ·        The availability of mining land for limestone and higher quality coal which are the major raw materials for cement is very critical. Securing reserves of these two raw materials would require high CAPEX.

 ·        CAPEX is also essential for future regulatory requirements like air quality, energy, carbon management, biodiversity, land and water.

 ·        Cement as a whole has to bear higher taxation as compared to other building materials. Even the steel that falls in the category of goods of special importance bears lower tax rates. The major solution to this lies in the implementation of GST for uniform tax regime.

 ·        Ambuja Cements recently announced the completion of its Sankrali expansion project that bears 2.4 million tonnes p.a. capacity. To meet the demand of eastern market and increasing supply to areas nearby West Bengal, the company had initiated a plant in that area. The plant remained effective in terms of customer orientation and lower logistic costs.

Conclusion: Despite economic and sectoral hiccups the company has been maintaining a consolidation in its top line and bottom line except for the year 2015 which saw a major drop. However, its quarter on quarter PAT stood threefold despite of muted revenues. Hence, we maintain a hold in the stock and wait for the recovery with the prospects taken-up by the company.