Ambuja Cements On Capex Drive

The country’s third largest cement manufacturer Ambuja Cements has planned to add a total of 5 million tonnes of cement manufacturing capacity with a total investment of Rs 2000 crore. As per news reports, this new capacity will be based in Rajastan and north India. This will enable the company to gain a larger market share there.

The annual report of Ambuja Cements for the year 2011 had given indication of capacity addition in this region. The review of the cement industry by Ambuja's promoter Holcim had recommended capacity expenditure in north India to improve efficiency and remove capacity-related bottlenecks.The company has said that another proposed capacity expansion in Sankrail (West Bengal) from 1.5 MT to 2.4 MT at an investment of Rs 324 crore will be completed over the next two years. With this, Ambuja’s total capacity will go up from 27.25 MT to 28.15 MT. It is already the largest player in the cement market in Bengal, with a total market share of 18%. The new capacity expansion will help it to further increase its market share. Another 1.25 million tonne of grinding capacity will be added in Sanand, Gujarat.

The firm is also setting up a new bulk cement terminal with a capacity of 1 MT at Mangalore, which is expected to be commissioned in March 2012. It currently has 3 bulk cement terminals in Surat, Panvel and Cochin. The addition of the Mangalore cement terminal will see enhanced cement distribution.

Ambuja Cements controls total 10% of the country's total cement market share, and these new capacities will help it to increase this further. 2011 was a very difficult year due to the slowdown seen across most of the sectors. In that year, the company saw a 5.45% growth in cement volumes. Its total sales were up 15%, though the net profit was flat due to higher taxes. In the September quarter of 2012, though, the company reported a 20% rise in the sales to Rs 2168 crore and its net profit jumped by 77% to Rs 304 crore. Thanks to higher realisations, its EBITDA margins also increased by 700 basis points during the quarter.

The scrip is trading at a price-to-earnings multiple of 22.3x its annualised EPS of Rs 9. We have already given a ‘buy’ call on the scrip and reiterate the same. With the new capacity additions, one can expect to see better financial performance in next two years.