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S. Vaidya Nathan

Well-set to capitalise on the improving industry scenario.

INVESTMENTS can be considered in the stock of Gujarat Ambuja Cements. However, it may be better to wait for the fancy for cement stocks, evident in the last few trading days, to run its course. Any room for downside risk in the stock is linked more to the broad market trends and to the possibility of FII-led liquidity drying up.

The earnings outlook looks bright, with the prospect of cement prices and, therefore, operating profit margins, stabilising at higher levels. There is some room for volume growth, as the effect of Gujarat Ambuja's new capacities will be fully reflected in its performance in full year 2004. A five-year loan sourced at 2.3 per cent in the international market is likely to further strengthen its financial position and aid in cutting interest costs.

Business Line had recommended a `buy' for the stock at Rs 162 in April 2003 and at Rs 175. Conservative investors, who have invested in the stock at these prices, can contemplate at least partial profit-booking to lock-in into the returns of between 40-50 per cent.

Strong revenue growth: Gujarat Ambuja Cements has, for the second quarter in a row, performed impressively on the volumes front. This has helped it improve the operating rates at the new two-million-tonne unit. This is of considerable long-term significance, as this unit, located in Maharashtra, caters to a surplus market. By aggressively pushing volumes, even if it meant absorbing lower prices, Gujarat Ambuja has improved its market share. Revenue growth rates, which were about 35 per cent in the April-June quarter, are likely to taper off as volume spurt from its new capacity wears off in about four-six months time. But what may add gloss to profitability is the improvement in realisation levels on the enhanced volume base. In 2003-04, Gujarat Ambuja may close out the year with volumes of about 10.2 millions tonnes (9.8 million tonnes in 2002-03).

Strength in efficiency: The performance in the latest quarter confirms, yet again, the cushion enjoyed by Gujarat Ambuja as a result of its high operating efficiencies. Despite flat price trends and enhanced excise duties, its operating profit margin has been 24 per cent. This is in line with its showing in the January-March quarter, but lower by about two percentage points on a year-on-year basis.

The strength on the volume front, essentially, stems from the higher operating margins, which have consistently been in excess of 20 per cent. This level has been maintained, in spite of an 8 per cent decline in cement prices. But for this comfort, the company may have found it tough to push volumes and improve the capacity utilisation in the new unit.

Any improvement in cement prices will flow straight to the bottomline. The pace and degree of consolidation in the industry and the lack of financial strength in the hands of most cement producers are bound to ensure better discipline in fresh capacity creationGujarat Ambuja and Grasim are likely to be prime beneficiaries.

Finance costs in check: Gujarat Ambuja is well set to emerge from the debt burden that piled up when it acquired ACC, Ambuja Cement Eastern and Ambuja Cement Rajasthan.

Replacement of high-cost debt with funds sourced at fine rates and tight working-capital management have led to 13.5 per cent decline in interest costs in the April-June quarter.

Given the sturdy trends in operating profits (even at lower cement prices), bearing annual interest costs, of about Rs 85 crore, is unlikely to pose a problem. Healthy internal cash generation of about Rs 400 crore in 2002-03, would also aid in cutting down debt levels. If the firm trend in the stock prices induces foreign-convertible bondholders to swap debt for equity, it would further improve the balance-sheet strength.

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