Ambuja Cement Equity Research

Date of Research – 12 January 2016

Price – Rs. 195.50

Ambuja Cement Limited (“Ambuja” or the “Company”) is one of the leading cement manufacturing companies in India. The Company was set up in the year 1983 and commenced cement production in 1986. Global cement major Holcim acquired management control of Ambuja in 2006. Holcim today holds a little over 46% equity in Ambuja. The Company was initially called as Gujarat Ambuja Cements Ltd and was founded by Narotam Sekhsaria in 1983 in partnership with Suresh Neotia. Ambuja Cement is an established brand in India for Ordinary Portland Cement (OPC) and Pozzolana Portland Cement, with significant presence across western, eastern and northern markets of India. The Company’s customers range from individuals house builders to governments to global construction firms.

The Company has five integrated cement manufacturing plants and eight cement grinding units across the country. Ambuja Cement has a captive port with three terminals along the country’s western coastline to facilitate timely, cost effective and environmentally cleaner shipments of bulk cement to its customers. The Company’s subsidiaries include Kakinada Cements Ltd., M.G.T. Cements Private Ltd., Chemical Limes Mundwa Private Ltd., Dang Cement Industries Private Ltd. and Dirk India Private Ltd. In June 2011, the Company acquired Dang Cement Industries Pvt. Ltd. In September 2011, ACL acquired 60% interest in Dirk India Pvt. Ltd.

*Financial Year starts from January to December.

Key Financial Figures

Consolidated(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
Total Income from Operations9,795.039,191.729,999.679,481.3420,343.83 
Expenses7,321.607,549.148,071.407,939.08  17,224.65 
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit)2,473.431,642.581,928.271,542.26  3,119.18 
Depreciation568.68493.67513.03629.76  1,463.18
Finance Costs78.4666.7565.5592.47  140.54
Other income348.52391.33424.33353.22  518.14
Exceptional items279.13(24.82)– 38.59
PBT1,895.681,498.311,774.021,173.25  1,995.01
Tax603.86219.87287.51365.37  576.00
PAT (before Minority Interest and share of Associates)1,291.821,278.441,486.51807.88  1,419.01
Profit/ (loss) attributable to Minority Interest(1.39)(0.13)0.01– 306.67
Share of profit/(loss) of Associates(8.79)
Consolidated Profit / (Loss) for the year1,293.211,278.571,486.50807.88  1,121.13

Profitability Analysis

Consolidated(%)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
Operating Profit Margin Ratio25.2517.8719.2816.27  15.33 
Net Profit Margin Ratio13.1913.9114.878.52  6.98 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
Share Capital308.44309.17309.95 310.38 397.13
Share application money pending allotment– 
Reserves & Surplus8,488.979,152.729,760.02 9,961.02 19,148.32
Employee Stock Option Outstanding– 
Net worth (shareholders funds)8,797.419,461.8910,069.97 10,271.40 19,545.45
Minority Interest0.840.710.720.72 4,377.77
Long term borrowings39.3233.4321.5523.55 23.58
Current liabilities3,044.612,853.283,154.68 3,229.53 7,547.01
Other long term liabilities and provisions25.8043.1142.5342.16 185.8
Deferred Tax Liabilities548.25564.32589.04 565.60 1,053.35
Total Liabilities12,457.1812,956.7413,878.49 14,132.96 32,732.96

 

Application of Funds / Assets(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
Fixed Assets6,474.456,844.257,001.776,586.59 21,985.44
Noncurrent Investments37.1029.6029.60 29.60 130.53
Miscellaneous Expenditure– 
Current assets5,292.745,527.286,002.71 6,520.99 8,148.03
Long term advances and other noncurrent assets652.13555.17844.39 1,025.38 2,468.96
Deferred Tax Assets0.760.440.02– 
Total assets12,457.1812,956.7413,878.49 14,132.96 32,732.96

Efficiency Analysis

 (%)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
ROCE27.9917.3019.1114.98 13.03
ROE / RONW14.7013.5114.767.87 7.26

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net Worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Consolidated
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
Total Income from Operations (Rs. Cr.)9,795.039,191.729,999.679,481.3420,343.83
Growth (%)13.64 %(6.16 %)8.79 %(5.18 %)114.57 %
PAT (Rs. Cr.)1,291.821,278.441,486.51807.881,419.01
Growth (%)5.24 %(1.04 %)16.28 %(45.65 %)75.65 %
Earnings Per Share – Basic (Rs. )8.418.289.615.215.65
Earning Per Share – Diluted (Rs. )8.388.279.605.215.65
Price to Earnings23.9822.1023.5544.5643.59

Dividend History

The Company has maintained an average dividend yield of 1.79 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. Ambuja’s average current ratio over the last 5 financial years has been 1.68 times which indicates that the Company has not been facing liquidity problems to pay for its short term obligations.

Long Term Debt to Equity Ratio

Companies operating with high debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

Ambuja’s average long term debt to equity ratio over the last 5 financial years has been 0.01 times which indicates that the Company is operating with a very low level of debt.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

Ambuja’s average interest coverage ratio over the last 5 financial years has been 32.58 times which indicates that the Company has been generating enough for the shareholders after servicing its debt obligations.

Ownership pattern

In its latest stock exchange filing dated 31 March 2016, Ambuja reported a promoter holding of 51.05 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 39.83 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.