Gujarat Ambuja Cements: Hold/Buy on declines

Recommendation: Hold/Buy on declines

S. Vaidya Nathan

GUJARAT Ambuja Cements has not exactly turned in the kind of performance that is expected from it, and the lower cement prices appear to have taken a toll on the fourth quarter performance.

But any decline in the stock's price, linked to the insipid performance in the fourth quarter, could be used to buy the scrip from a long-term perspective. That it is, perhaps, the better option in the cement industry even now is borne about by the numbers for 1999-2000.

The company's profitability at the operating level for the whole year continues to be a healthy 35.63 per cent. Considering that prices have been rather weak through the year across markets, the numbers show up the high cost-efficiency of Gujarat Ambuja.

This augurs well for the company as any improvement in cement prices would contribute to the bottomline. In a year of rising costs, the company's cost-efficiency has also helped it maintain the operating profit margin at around 30 per cent. The company reported a 16 per cent rise in its sustainable post-tax earnings.

Stressed Q4: The full-year performance was dragged down considerably by the indifferent showing in the April-June period (the fourth quarter for the company). The operating profit margin took a knock and dropped nine percentage points compared to the previous quarter and the rest of the year.

After a long time, the OPM is slipping below the 30 per cent mark. But the company managed higher volumes compared to the preceding three years with sales of around Rs. 306 crores. The interest outgo was higher -- perhaps the consequence of the borrowings made to finance the acquisition of DLF Cements and the 7.2 per cent stake in ACC.

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The post-tax earnings was Rs. 20 crores, a sharp decline compared to Rs. 50-55 crores in the preceding three quarters. The fall in cement prices took a toll on the company, and if it managed to report a profit, it is because of the cost-efficiencies and the higher operating profit margins.

A better show: The company's performance for 1999-2000 as a whole was fairly good, considering the current price trends. On an average, prices were at 1998-99 levels. Volume growth was marginal at around 1 per cent and sales rose 5 per cent to Rs. 1,117 crores. The higher sales is largely a consequence of the performance in the first two quarters when the prices were high enough to allow an OPM of around 40 per cent.

Operating costs increased 6.36 per cent year-on-year, a direct consequence of the problems of Q4. The company reported sustainable post-tax earnings of Rs. 175 crores. But the net profit, after considering the one-time earnings, was Rs. 428 crores.

During the year, the company sold its stake in Hometrust Housing Finance to HDFC and Ambuja Cement Eastern to a group company, Ambuja Cement Holdings. This contributed Rs. 253 crores to the earnings stream. The debt burden incurred to finance the acquisitions may be partially retired with these cash flows and the benefits may get reflected in the 2000-01 performance.

Outlook: Gujarat Ambuja's performance has been constrained by the lack of capacity. It has a capacity of around five million tonnes. But this is likely to get corrected this fiscal with the commissioning of a two-million tonne plant in Maharashtra. The company expects to have a capacity of 12.50 million tonnes by December 2001.

With the possibility of Ambuja Cement Rajasthan (the erstwhile DLF Cements) merging with Gujarat Ambuja Cements, the latter may have a higher capacity at its disposal. Even if the industry's pricing power improves to some extent, a combination of higher volumes and operational efficiencies may enable Gujarat Ambuja post higher levels of earnings over the next two years.

The company also appears to have taken care of major MNC competition by picking up a strategic 11.2 per cent stake in ACC and vesting it in Ambuja Cement Holdings. SEBI has also ruled out an open offer. While the strategic move has ensured that Gujarat Ambuja stays ahead with large capacities, the possibility of someone eyeing the Indian market and making a bid for an open offer for ACC cannot be ruled out.

The Gujarat Ambuja group would get the `promoter' status only after 27 months and that is a long time. Should such a situation emerge, Gujarat Ambuja may be required to come-up with a counter bid for a controlling stake that is beyond any threat.

But if it is able to have institutions on its side (which is quite probable), the Gujarat Ambuja group may have adequate stake to stall any other prospective bidder for ACC. If the open offer requirement does not come about, Gujarat Ambuja may have good cash flows to raise its capacity without expanding the equity base significantly. Against this backdrop, shareholders can stay invested and fresh exposures can be contemplated at declines with a two-to-three year time period.