Strong pricing in western India drives gains for Ambuja Cements

Ambuja Cements recently announced it had secured limestone supplies in Maharashtra. The estimated limestone resource (reserves) stands at 42 million tonnes (mt), which Ambuja secured at a final bid price of 125.05 per cent of value of mineral dispatched; the premium is over the limestone price notified by the Indian Bureau of Mines. This bodes well for the company’s limestone security, especially looking at its significant exposure to the market in western India.

While the company has 4 mt capacity at Chandrapur district itself where the limestone deposits are located, the resources can cater to another 8 mt cement capacity in neighbouring Gujarat, say analysts. Chandrapur also has good railway connectivity and hence is logistically well-suited, Binod Modi at Reliance Securities said. Additionally, the reserves augur well for Ambuja’s planned capacity expansion at Chandrapur and other locations. Although the limestone reserves have been secured at a premium, on per tonne cement production cost basis they will not have a significant impact, Modi said.

Securing of raw material and capacity expansions hold key to company’s future prospects. Ambuja is in the process of setting up 1.7-mt greenfield clinker capacity at Rajasthan’s Marwar and other expansion plans, which will accrue benefits once completed. In the past, the company has been slow in adding capacity, which has been a concern for analysts and investors.

Data from a foreign brokerage suggest Ambuja’s capacity has grown at a CAGR of just 2 per cent during the calendar year 2011-16 (CY11-16) versus India’s capacity growth of 6 per cent. This has led to subdued volume growth for the company. Thus, all eyes will be on capacity expansions and the merger of ACC with Ambuja, which can lead to gains on many fronts. 

All these could add to the recent outperformance in Ambuja Cements’ stock price (vis-à-vis peers such as UltraTech and Shree Cement, and even ACC) on the back of improving realisations in western India. Modi said a 10 per cent improvement in cement prices in western India (40 per cent of Ambuja’s sales volume) had driven all-India average cement prices in the June quarter, while Edelweiss said prices in the West were up 14 per cent. This, along with an estimated 6 per cent increase in volumes, would lead to a strong performance by Ambuja in the June quarter, even as costs are rising.

Given these expectations and the projected spurt in cement demand after the monsoon season, Ambuja may see some more gains on the bourses. 

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