Ambuja Cements - Investment Idea - Religare

Company Overview

Ambuja Cements is a major cement producing company in India. The principal activity of the company is to manufacture and market cement and clinker for both domestic and export markets. The company has five integrated cement manufacturing plants and eight cement grinding units. The company has its own fleet of ships.

Investment Rationale

- The company has more than one third of its exposure in northern region of the country where the utilisations are expected to improve. With demand expected to grow at a rate of 8-10% and no substantial capacity enhancement in the region, utilisations levels will improve to nearly 75% in next couple of years in this region from the current level of 67%.

- The company plans to invest Rs 1,800 crore by Dec. 2013 to expand its production capacity. It will set up a 2.2-million-tonne clinkerisation unit at Nagaur in Rajasthan. It has also initiated steps in Southern markets and plans a new brownfield expansion project to enhance capacity at its Sank rail grinding unit in West Bengal.

- From a longer-term perspective, it is important to continue developing alternative fuel sources, particularly industrial and agriculture waste materials. To mitigate fuel-associated risks, the company has taken up projects to increase use of alternative fuels and waste-heat recovery system. The company has commissioned its first wind power project in Gujarat.

Risks and Concerns

Securing energy resources, primarily coal, remains critical in view of availability per se, quality and substantial cost impact. Besides substantial increase in coal prices by the largest domestic coal supplier, availability of linkage coal remains an important cost driver.

Availability of adequate logistics infrastructure is just as critical for future success as building clinker and cement plants. Shortage of rail wagons is a common problem causing bottlenecks in the supply chain. It has taken steps to improve its own logistics infrastructure.

Outlook

The growth in demand and the forthcoming general election is the major trigger for cement stocks. Interest rate cut is also a good sign which would positively impact the demand from the housing, infrastructure and industrial segments. The government's focus on reviving investment demand and the positive outlook on the rabi crop will boost rural housing demand, thereby spurring demand.

Source : Equity Bulls

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