Cement asset pricing will see a re-rating: Anil Singhvi

SMART TALK/ Anil Singhvi, Executive Director, Gujarat Ambuja Cements

Gujarat Ambuja Cements recorded a 106 per cent increase in net profits to Rs 145.23 crore in the third quarter ended March 31, 2004, against Rs 70.63 crore for the same period in the previous year.

Turnover for the quarter increased to Rs 559.10 crore from Rs 472.11 crore, an increase of 18 per cent, with analysts attributing the performance to cost reduction effected by the company as well as better market prices.

The company has also proposed an interim dividend of 50 per cent for the fiscal ending June 30, 2004. The scrip trades at Rs 337 levels at a P/E of 19x.

Anil Singhvi, executive director, spoke to The Smart Investor about the company's quarterly performances as well as his outlook for the industry. Excerpts:

What are the factors that improved profitability this quarter?

We can attribute the good performance to two things - enhanced productivity and and a better product mix. Last year has been rather difficult in terms of cost inputs because the cost of coal and other fuels has gone up.

Keeping costs under control was a challenge, which we met by improving efficiency. Demand has been good and the pricing has been better this quarter. We have sold more cement in the domestic market than the overseas markets.

What is the growth on the volume front?

Volume growth has been just about 2 per cent. But in the domestic market we sold 12 per cent more. We had to reduce exports because of high shipping prices.

The shipping scenario has been tight globally. Since we sell on a free-on-board basis we had to move the material to the domestic markets as we could not get ships from buyers.

Last year you achieved around 11 per cent growth in terms of dispatches. What is the target you have set for yourself this year?

We should be able to do 10 per cent in FY04-05. We did about 13.20 million tonnes last year and we should be able to do 14.50 million tonnes next year.

The company has been using lignite as fuel for some time now. What is the progress on that front?

We have been using lignite as fuel in Gujarat. But not a large portion of lignite is used as the quality of lignite in Gujarat is not very high. We need high quality clinker and cement. So we have not replaced coal completely with lignite.

What kind of targets are you looking at in terms of cost savings in FY05?

We will focus more on our fuel and power costs. We are looking to reduce the fuel costs by at least five per cent. In power we are looking to save costs by four to five per cent.

Are you looking at any capacity enhancements in the coming year?

Right now we are not looking at setting up any new plant. For the next 12-18 months our focus would be on higher productivity from our Eastern plants and as and when opportunity arises we might look at acquiring fresh capacities.

In terms of acquisitions we are looking at capacities in West and North. We sell cement to the retail segment. We don't sell it infrastructure-wise or to the wholesale market.

In the retail market it is important to have a proper distribution network and a brand pull. Since we have a presence in North and West it will be easier for us to leverage on those areas, where we have the necessary infrastructure and a brand presence. As of now we are not looking at South.

How do you see the price trend this year?

The price trend is looking good at present. We see some scope for the prices to move up in Gujarat and Maharashtra where the prices could move up by 8-10 per cent. The demand in North is also good. We might see another 5 per cent rise in cement prices there, too.

What about the company's debt reduction plans?

We have substantially reduced our debt. Our debt-equity ratio as on June 30 is 50 per cent, which is one the lowest globally. It doesn't make any sense to become a debt-free company. Then you are doing a very poor job for shareholders.

Debt is cheaper than equity which means there should always be good mix of debt and equity. You should be in a situation where your debt should not come below 50 per cent and should not go above 100 per cent. Since we are already under 50 per cent, we should be borrowing money for future growth.

How is the export market scenario?

Export markets are good. The shipping situation is easing out now and June quarter should be better in terms of exports. But again Monsoon months are difficult for exporters.

Our long-term approach would be to sell more and more in the domestic markets because export realisation can never match domestic realisations.

What is your outlook for the domestic industry?

The outlook is good. The demand-supply gap has shrunk considerably. There is hardly any over-supply situation today. As we move forward, we expect a demand of 125-126 million tonnes in the industrial sector.

Industry's capability to produce is much more than that. Demand-supply equation seems to be favouring demand more than supply, which is very good for the industry.

How has the consolidation that has taken place helped the industry?

Consolidation is a good thing to happen. Earlier the industry was very fragmented. Five years ago, the top 5 players had not even 30 per cent of the capacity.

Today the top five players have around 70-75 per cent of the capacity. India is a regional play in terms of cement. Each market has three or four large players who bring in pricing stability.

What about industry valuations?

With the industry's prospects favouring demand, pricing and consolidation, we think cement asset pricing will go for a major re-rating. Only economic slowdown and political uncertainty can be major impediments for industry growth.

Are you happy with the company's valuations?

Definitely not. Looking at our quarterly results, we should be completely re-rated and I think there is a tremendous potential in terms of making investments in Gujarat Ambuja and having good returns. I think there is a buying opportunity in the scrip at current levels.

In the next 12 months, we expect the stock to outperform the index by at least 10 per cent, which is a very good safety margin.