Date: 11th July 2000
Gujarat Ambuja - I can, I can, I can
Current market price - Rs215
BSE Sensex - 4898                

Give a man orders and he will perform the task. But let him set his own targets, give him freedom and authority and it becomes a personal crusade. So it is with a company which is nourished by such men. And when Gujarat Ambuja says "I Can" with passion, we implore you to stand up in unison and say "We Can (buy)".

What is the Business?
Gujarat Ambuja a.k.a. GACL and its subsidiaries, with an annual capacity of 8.5 metric tons (mt), is the fifth largest producer of cement in an industry, which churns out 94mt annually. GACL has three subsidiaries - Ambuja Cement Rajastan, Ambuja Cement Eastern and Ambuja Cement India Ltd. Together they operate seven cement plants spread predominantly in the northern and western regions, all strategically located to optimize transportation cost through proximity to markets. And more importantly, whatever it does, is with cement in mind. The 11% stake in ACC, is a classic example. This acquisition will equip GACL with ACC's capacity of 12mt and its distribution network. With ACC's 8,000 dealers and GACL's 2,000, and an overlap only in the north, the leverage will be exponential. About GACL's plans? A 2mt greenfield plant in Maharashtra, 1mt grinding plants in Bhatinda and West Bengal, a 0.5mt terminal in Sri Lanka and plans to expand capacity across its plants at Gujarat, Andhra Pradesh and Himachal Pradesh. On the whole, to double capacity to atleast 16mt. Well, focused, is the word we are looking for.

Who is the Management?
Impeccable! We cry. If there were one shepherd you would trust your precious sheep with, let Sekhsaria and Co be the chosen one. For in all its actions the one omnipresent factor has been the share holder. A consistently high dividend payout (average of 54% over the last 5 years), strong EPS (an average of Rs18.6 for the last 5 years) and extremely transparent practices have characterized the management philosophy. However, the management's financial and operational savvyness is where it should be back-thumped. Taking advantage of the sales tax exemptions and innovative production methods, GACL has been able to enjoy very high cost efficiency - a virtual boon in the industry. But a concern remains. GACL has been the product of the vision and entrepreneurial zeal of one individual - Narottam Sekhsaria. With no concrete succession plan on the drawing board, the issue is a thorn, which can mar the future.

Whither Cash flows?
In an industry where the alphabet 'C' reigns supreme (Cement=Capacity=Cake), GACL's forte is the fourth 'C' which makes the cake a reality - Cash. With its shopping cart filled to capacity and plans for green-field / brownfield plants aplenty, it is imperative for the cement giant to have deep pockets. And there is no rabbit coming out of the hat. GACL's working capital management has been note-worthy, even during lean periods when there has been little or no inventory. A very judicious funding of investments coupled with an average bottomline growth of 13% (over the last 5 years) have ensured a steady stream of cash. The one jarring note has been the ACC acquisition. The Rs70bn purchase, may have stretched the GACL coffers a wee bit. But the future payoffs in the form of increasing capacities and a complementary distribution network will offset this expensive purchase.

Why should I Buy?
Other than cement and aluminum we do not prefer old economy stocks and if we did have to consider one, it has to be GACL which is being discounted at a P/E multiple of 16.4x. The ACC acquisition has a lot of synergies - an increase in capacity to almost 20mt, complementary distribution network and a geographical presence extending to the east and south. This will make GACL a dominant player and give it an edge over competition, both foreign and local. Moreover, as the economy revives, the first sector that will pick the uptrend, would be cement and consequently Gujarat Ambuja being the de facto leader. An able management and strong capacities combined with the lowest cost base in the cement industry, will ensure that the company has a say (sorry, the say) in a market place, where price decides fates. Do not ignore this in the cacophonic haggling over 'old economy vs. new economy' balderdash, but listen to the more subtle voice calling 'I Can'.

Where can I go Wrong?
If cement prices fall (on postponement of demand or overcapacity) or if the economy fails to recover, GACL may be in trouble. But the immediate problem is at home - the ACC acquisition. GACL's fortune would depend upon how fast and at what cost ACC could be turned around. Another issue would be the amalgamation of the two contrasting cultures. And the cuppa of woes would overflow if the Birla or L & T increases capacity and the markets overlap. Plausible scenarios but not uncommon for GACL who has had its baptism by fire.

Bala Gopal Menon

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