Ambuja Cement, was acquired by Holcim in 2006, before which it was owned by the Sekhsaria and Neotia families. Holcim, by the way is the largest cement producer in the world, with a presence in 90 countries.
No expansion
While Holcim acquired Ambuja (and ACC), it eventually reached a conclusion that it doesn’t want to expand capacity in India. In several interviews, discussions and analyst interactions, Holcim mentioned how it didn’t make sense adding capacity in India because the return ratios were simply not attractive enough. So, Ambuja ended up with a minimal capacity addition in a high-growth market like India.
Last in the race
Over the last 10 years, Ambuja’s cement production capacity grew from 28 mtpa to 32 mtpa. In the same period, Ultratech went from 51 mtpa to 117 mtpa, Shree from 14 mtpa to 45 mtpa, and Dalmia from 17 mtpa to 37 mtpa. The result? Ambuja kept losing market share. From being the third largest producer, in ten years, it slipped to number 5.
Also the least profitable in the race
It wasn’t only the capacity addition that was lagging; the cement industry in the ten years also saw several technological upgrades. Cement producers started:
Using petcoke instead of coal (cheaper option)
Separating clinker and grinder facilities (better efficiency)
Capturing the heat generated in making cement, and reusing that to save on energy costs
Using more efficient machinery to improve efficiency
Because Ambuja wasn’t adding any new plants, or investing in upgrading technology, it also started to see higher costs for manufacturing cement, compared to its peers. Not only was Ambuja losing market share, but it was losing out on profitability.
All of this obviously reflected on Ambuja’s stock performance, which lagged all of its peers. It was that untouched child in the cement pack.
Finally, the change!
Jump to the end of the 2010s. Ambuja finally started talking about expansion. What changed?
The Holcim group finally realised its missing out on the India story. The NDA government had been focussing heavily on infrastructure development. This development was multi-directional. From housing for all to roads everywhere, cement was being guzzled away across the country. It didn’t matter if the urban real estate industry wasn’t doing well. Government spending and infrastructure development itself was taking care of strong demand growth.
Government spending for the win
Cement consumption is spread evenly between urban, rural and infrastructure. The government’s thrust on affordable housing has been doing wonders. Both its schemes, the PMAY-U and PMAY-G (Pradhan Mantri Awas Yojna - Urban and Gramin for those who haven’t been listening to the PMs speeches) have been adding to traction in a big way.
Numbers alert! In the Urban scheme, the government helped add about 11 million houses, for which, about 91 million tonnes of cement was used. Now, looking at how many more houses are to come under this scheme over the next 5 years, 15-18 million tonnes of cement will be used every year. The annual demand for cement is 420 million tonnes in India. Basically, this scheme itself would take care of 4-5% growth.
And on top of that there is infrastructure. Lets tell you a little secret (more like an underlying fact). The general elections are held every 5 years, right? Now, each government, doesn’t matter who, spends a bulk of its infrastructure money in the last 2 years before the election. Why? Theatric value! The next election will be held in 2024. What does it mean for 2022 and 2023? No points for guessing.
Back to Ambuja and its growth
Finally, Ambuja has decided to (re)join the race. It now plans to increase its production capacity from 29.7 mtpa to 50 mtpa in the medium term. It has already laid out how it will get to 40.9 mtpa. This will come from both greenfield and brownfield expansion, across Rajasthan, Punjab, Maharashtra and Chhattisgarh.
In the cement industry (a growing one), the simple rule is that more capacity leads to more production to more sales to more revenue to more market share (if capacity addition is higher than peers). But, here there’s more!
More benefits than just higher capacity
For Ambuja, there are two more dimensions to look at on capacity addition.
1. Where the new capacity is being added
Currently, Ambuja has >75% of its capacity in the North and West of India. Most of its expansion plans too are in these two regions. Out of all the regions in India, the most favourable for a cement company are North and West. Why? Demand in the North and West is higher than the supply. So? Prices for cement can remain elevated in the North and West, and profitability will be higher compared to other regions. The East is seeing too much capacity being added, and new players will fight for market share and undercut eachother on pricing. The South has too much limestone and too many small players, leading to an always-tepid pricing environment. In short, Ambuja is very well placed.
2. What the new capacity will do other than revenue growth
Because Ambuja didn’t add any new plants over the last ten years, and ran its production on old technology, its efficiency was lower. Remember, we spoke about this? Now that new plants are being added, Ambuja will adopt new technologies, and see an improvement in overall profitability. Want us to bore you with some of the things they are doing other than capacity addition to improve profits?
Underground mining from Gare-Palma IV coal block
New railway siding at Rabriyawas, Rajasthan
New limestone mining lease at Maldi Mopar, Chhattisgarh for the Bhatapara plant
Mining lease at Lodhva, Gujarat for the Ambujanagar plant
Mining lease at Nandgaon Ekodi, Maharashtra for the Chandrapur plant
Setting up fly ash dryers / hot air generators at Ropar and Bhatinda (Punjab), Nalagrah (Himachal Pradesh), Dadri (Uttar Pradesh), Roorkee (Uttarakhand) and Rabriyawas (Rajasthan)
Improvement in logistics efficiency
And then there’s benefits from ACC too
The Holcim group didn’t just acquire Ambuja, but ACC too. However, because of complications, it hasn’t really been able to merge the two companies. It has also given up on merging them. Instead, ACC and Ambuja have now signed an MSA to collaborate and increase efficiency for both, and even reduce costs for both.
One can transfer clinker to another’s grinding facility because it’s nearer, both can use their respective brands in some markets while getting cement from one’s facility, they can source material together and get bulk discounts, etc.
This way, it is estimated that they would each see a 3-5% improvment at the PBT level.
Net result? Higher earnings
More capacity + Better demand + Higher pricing = More revenue. Better capacity + Cost saving measures + Better pricing = Better profitability.
How much better? Materially better. Check the below chart out.
And better valuations too
Ambuja has historically traded at valuations materially lower compared to its peers. Of course, it wasn’t growing, had no intentions to grow, and was at a lower profitability despite having a strong brand (good brand = more retail sales = premium pricing).
However, the narrative has now changed. With the industry itself doing well, and Ambuja doing better (versus itself historically, and its peers), it can command higher valuations.
What about the stock?
What this means for the stock is pretty neat. Stock prices are, simply put, a function of earnings growth times the multiple; in this case EBITDA multiplied by the EV/EBITDA multiple. 20% EBITDA CAGR expected over the next two years, combined with higher multiples can work well for the stock from here!
Of course, there are risks to this. If demand pick-up isn’t as much, if Ambuja’s capacity addition gets delayed, if pricing doesn’t sustain, if input costs increase too much and profitability gets eaten up, and many more.
Why Ambuja?
We don’t have Ambuja in any of our portfolios. However, we did do a webinar on the cement industry and Ambuja Cement with InvestingHub. Do check it out. Also, it’s free if you use the code RUPEETING to sign up!