Gujarat Ambuja Cements: Buy into a firm footing

S. Vaidya Nathan

Recommendation: Exposures in the Gujarat Ambuja Cements' stock can be considered in a phased manner over the next few months.

The company has sound fundamentals and could deliver fairly good returns over a two-year time horizon. Any declines linked to the broad market could in particular be used to pick up exposures in the stock. As far as the other listed firms in the Ambuja group go, shareholders in Ambuja Cement Eastern and Ambuja Cement Rajasthan could stay invested. Shareholders in ACC -- a company in which Gujarat Ambuja holds a 14.4 per cent stake -- can also stay invested as efficiency improvements could improve profitability.

As a company which has a high degree of efficiency, it is well placed to operate in an environment where cement prices could weaken. The concern area is with regard to the disclosures regarding plans for the group as a whole in the cement business. It has two distinct arms and information flow has been rather opaque. But concerns over this aspect appear to be priced in into the stock. Notably, the stock missed out on the 90 per cent rise in the cement sector stocks since October 2000. The Gujarat Ambuja stock has been stuck in Rs 155-170 range.

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Suitability: The Gujarat Ambuja stock is appropriate for investors with an appetite for some risk. Investments would have be done with a view to taking profits at regular intervals - say when prices move 30-40 per cent from the present levels. To buy and stay invested in economically sensitive and commodity stocks may not deliver value over time. Only investors who could actively track cement prices and capitalise on exit opportunities should take exposures.

Performance: The company has turned in a decent performance in the January-March 2001 period with a 34 per cent growth in earnings. This was a change in trend after a 40 per cent decline in the preceding quarter. The earnings numbers in these two last quarters seem somewhat surprising given the high cement prices and the high efficiency levels of Gujarat Ambuja. Volumes have been marginally higher. The operating profit margin has, as usual, been close to 30 per cent.

An encouraging aspect is the fact that the company has more or less managed to tie up quasi-equity by way of Euro Convertible Bonds (convertible into equity at Rs.221 per share). This should help cut the debt burden incurred in acquiring control over DLF Cements and picking up a strategic stake in ACC. The company's equity base is slated to go up to Rs 168 crore if the $ 100-million ECBs get converted. As of June 2000, the company had loans of Rs 1,182.39 crore on a shareholder fund base of Rs 1,511 crore. This could improve if the convertible bonds are converted into equity.

If cement prices continue to be attractive, Gujarat Ambuja Cements may end the year on a better note than 1999-00 (profit: Rs 174.56 crore). The share trades at a price-earnings multiple of around 17 times its likely 2000-01 earnings. From a medium term perspective, scope for capital appreciation exists.