Concrete approach

Holcim companies, ACC and Gujarat Ambuja kick off expansion drive

Cement companies are on a major expansion spree. Over 50 million tonne of fresh capacity is expected in the next three years, which is a 30 per cent rise from the existing capacity in the country.

On Friday, both Holcim companies-ACC and Gujarat Ambuja-announced new capacity expansion plans of 3 million tonne each. The investment requirement for both projects is similar at around Rs 1500 crore each. However, these expansions are not going to impact both the companies till CY09 or CY10.

ACC's new capacity will come in Wadi, Karnataka, where it already has a plant. This will increase ACC's capacity by about 15 per cent. Though the southern region will have surplus capacity, it is going to be lesser incremental capacity on a high base of consumption, say analysts. The southern region accounted for over 30 per cent of the country's cement consumption.

Gujarat Ambuja is already expanding its capacity by 3 million tonne in Chhattisgarh, and after both these expansions, its capacity will go up to 22 million tonne.

This new plant will be coming up in Himachal Pradesh, which will be able to cater to Haryana and Punjab regions. In the northern region, analysts expect demand to match supply in FY09 as new capacities of Jaiprakash Associates (a 4.55 million tonne per annum cement plant in Himachal which will start production in FY08), Lafarge, India Cements and Grasim come up.

Analysts say that Gujarat Ambuja' may be trying to maintain market share, though it will get some excise duty exemption.

Both companies have benefited from increasing demand and rising prices. In the September quarter, Gujarat Ambuja's operating profit margin improved by 980 basis points y-o-y to 36.1 per cent.

In case of ACC, its operating profit margin expanded 1155 basis points to 26.6 per cent in the last quarter.

However, the two stocks aren't cheap""ACC trades at about 21 times estimated CY06 and 19 times CY07 earnings. Gujarat Ambuja is relatively cheaper at about 12 times CY08 earnings.

Bank of India: Global drive

Bank of India's acquisition of 76 per cent controlling stake in PT Bank Swadesi, Indonesia, for about $25 million is an example of the need for the Indian banks to go global with competition heating up in the domestic market.

With this, Bank of India has become the third Indian bank after State Bank of India and ICICI Bank to acquire an overseas bank and the first one to acquire a listed bank outside India. Last year, SBI had bought 76 per cent stake in Indonesia-based PT Bank IndoMonex, while ICICI had bought a Russian bank a few years earlier.

PT Bank Swadesi is small; it has four branches, six sub-branches (which can undertake only limited banking activities), six cash points and a mobile ATM van with an asset base of $100 million, deposits of $75 million and a net worth of $11 million.

Unlike Bank IndoMonex, Bank Swadesi also has foreign exchange licence, which can rev up Bank of India's forex dealing business.

With Bank Swadesi, Bank of India will get a functioning set-up which is time consuming otherwise. It will also enhance BoI's presence in Indonesia, where it has a representative office for over 33 years. BoI has international presence for the past 60 years.

Further, BoI can also take advantage of NRIs in Indonesia and its proximity to Singapore and Hong Kong where it already has branches. The increasing import-export trade between India and Indonesia and rising number of Indian corporates setting up offices there would help too.

Corporates such as the Aditya Birla group are already doing business in Indonesia, and recently, TVS Motor, announced that it would launch a product there.

Bank of India has made this acquisition at a pretty reasonable valuation of about 2.2-2.5 times book value. But for investors, there is nothing to get excited as the size of the bank is too small to affect Bank of India's balance sheet. BoI trades at an expensive 1.4 times estimated FY08 book value.