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Gujarat Ambuja Cements: Buy Grasim: Buy ACC: Hold L&T: Hold and evaluate open offer

GRASIM, Gujarat Ambuja Cements and Madras Cements — it is down to these three as far as long-term investment options go. No doubt, Larsen and Toubro (L&T) and ACC are among the top four on capacities. But the structuring of their cement businesses is riddled with uncertainty.

Shareholders in these two companies could, however, stay invested and see how their business plans unfold. Any sharp spurt in their prices is also unlikely. The possibility of restructuring happening in a hurry is rather remote.

L&T: Especially in L&T's case, plans for a demerger have been on the table for quite some time now. If that happens, according to L&T's plan, there could be room for value gains, depending on the mode adopted to sell the strategic stake.

However, if Grasim has its way, its version of the demerger may not leave much scope for gains. This is a call that investors can make before the open offer in June.

ACC: Gujarat Ambuja has not revealed its hand yet. Improvements in efficiencies and an aggressive marketing mode show the impact of Gujarat Ambuja's business approach in ACC's operations. ACC also continues to be a possible candidate (increasingly becoming a distant prospect, however) for a hostile bid, as the Ambuja group still has only 14.4 per cent.

ACC continues to be relatively overvalued compared to its peers. But till its ownership is firmly settled, some amount of speculative undertone in the valuation is inevitable. Gujarat Ambuja and Grasim are the better investment options in the industry.

Gujarat Ambuja: It continues to score high on operating efficiencies and an aggressive business approach vis-à-vis its peers. It is best positioned to play the volumes and efficiencies game and await price recovery. Its debt burden — though managed at fine rates — may cast a shadow on any sharp immediate upside.

Grasim: If Grasim manages to get its open offer for L&T at Rs 190 per share or, more likely, a demerger and then an open offer for the cement unit at Rs 130 per share, through, its strength would get enhanced considerably.

Grasim has managed to come through a period of sluggish prices well. Any price recovery would go straight to the bottomline. At current valuation levels, it may be a good investment option.

Madras Cements: It is likely to be dogged by sluggish demand, low operating rates and excess supply in its key markets. The upside may be limited in the near term. It is, however, a good long-term play.

Others: Most other cement stocks are potential takeover options. But the risks are high as buyers are on pause mode and sellers wait for a preferred price based on expectations not always rooted in reality.

Suitability: In all these stocks, a buy and hold approach would not pay. It would be better to book profits using any upside of 20 to 30 per cent.

S. Vaidya Nathan

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