A Project On

FINANCIAL ANALYSIS

Of

AMBUJA CEMENTS LTD.

Submitted By:

Darpan Gupta Dhruv Chaudhary 2010BB50012 2010BB50015

Indian Institute of Technology, Delhi April 2013

Acknowledgement

We would sincerely like to thank Mr. Sanjay Gupta, Head (marketing and commercial services), Ambuja cements Ltd. for giving us his precious time to talk to us and brief us about the company. We would also like to thank Prof. Shweta Singh for teaching us SML-­‐401. Most of the data has been taken from www.moneycontrol.com and rest from the company official website : www.ambujacement.com

Table of Contents

Cement Sector – India: ........................................................................................ 4 Ambuja Cements: ................................................................................................ 4 History: ............................................................................................................. 5 SWOT Analysis:................................................................................................. 5 Competitor Analysis: ........................................................................................ 6 Broad Strategy:................................................................................................. 6 Liquidity and Solvency Analysis: .......................................................................... 7 Leverage and Financial Analysis: ......................................................................... 7 Profitability Analysis: ......................................................................................... 10 Cash Flow Analysis:............................................................................................ 10 Loaning out Money to Company: ...................................................................... 12 Recommending Company Shares to Investors:................................................. 13 Appendix: .......................................................................................................... 14

Cement Sector – India: India is world’s second largest producer of cement only next to China. According to the Cement Manufacturers Association the annual production of cement in the country was 300 million tonnes in the year 2010 and is expected to reach 550 million tonnes by 2020. By the year 2011, India had 137 large and 365 mini cement plants. Not only India fulfils its domestic demand for cement but it also exports cement to around 30 countries all across the globe. The demand of cement in India can be divided into four key segments as shown in the figure below:

9% 11% 13% 67%

Housing Infrastructure Commercial Construc`on Industrial Sector

The Indian Cement industry has a huge potential for growth and this is one of the reasons that the industry has seen a lot of investment recently. The domestic as well as the international players have invested heavy sum of money to increase their production capacity. However the factors that prompt them to do so or suggest heavy growth are listed as below: • Increasing per capita income, increase in nuclear families, rapid urbanization and the number of rural and affordable housing schemes launched by the government has led to increasing demand from the residential sector. The per capita consumption of cement in India (150 kg per capita) is way lower as compared to the world average (350 kg per capita). This leaves a lot of potential for growth. In the recent times there has been an increase in the construction activity, leading to increasing demand for cement. The government spending on infrastructural activities has increased a lot in the recent times thus again leading to increase in the demand.

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Ambuja Cements:

The cement industry is literally the building block of a nation and economic development of a country is often measured in part by a country’s cement output. Thus as one of India’s largest sement manufacturing companies, Ambuja Cements plays a key role in India’s development and in designing the blueprint for its future. The vision of the company is to be the ‘most admired and competitive company in the industry’. And its Mission is to ‘Create Value for all’.

History: The company was initially called Gujarat Ambuja Cements Ltd and was founded by Narotam Sekhsaria in 1983 with a partner, Suresh Neotia. Cement production commenced from 1986 and then the global cement major ‘Holcim’ acquired management control in 2006. The company has grown dynamically over the last ten years. Its current cement capacity is about 27.25 million tonnes. It has a reputation of being one of the most efficient, profitable and innovative cement manufacturers in the world while also maintaining environment protection measures which are on par with the finest in the country. ACL has also pioneered the development of the multiple bio-­‐mass co-­‐fired technologies for generating greener power in its captive plants. It has always nurtured a spirit of enterprise and searched for cutting edge technology and is in many ways a benchmark for the cement industry in India.

SWOT Analysis: Strengths • Strong Dealer Network o Strong dealer distribution network with over 6,000 dealers and 20,000 retailers. o High market share based on the strong volumes generated by the Distribution Network. Strength of its Brand o Pioneered creating a brand out of a commodity that is cement and commanding a premium because of that. o Started a special cell to provide technical services to consumers and masons o The company has consistently provided high quality cement, backed by excellent service. Balance sheet strength o The Cash balances have increased significantly over the last year o Interest coverage ratio is also higher than last quarter which suggests enough leeway for borrowings even if the company wants to fund further expansion through borrowings. Faster domestic growth than industry Greater Volume strength o The company has added to its clinker capacity by the way of two clinker units, each of 2.2 million tonnes capacity, at Chhattisgarh and Himachal Pradesh (HP). o The company's overall capacity stands at roughly 27.25 million tonnes now.

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Weaknesses • Increasing Margin Pressure o Increased pressure from input costs over the last few quarters. o Increase in freight expenses due to higher cost of diesel and petrol o Higher expenditure on power with increase in cost of imported coal o Rising price of fly ash and gypsum o Rupee's sharp depreciation against dollar also increased landed cost of coal for company High dependence on macroeconomic conditions o Current slow growth of economy & capex activities will affect company’s performance. o Inflation and interest rates should reduce to encourage purchase by home buyers Cement price fluctuations in the Northern Market

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Cement prices have fluctuated in the Northern Market, unlike in the South, from where Ambuja Cements gets the majority of its revenues. Furthermore cement price didn't offset the increase in input prices entirely for players in northern India, including Ambuja Cements, and profit growth was hard to come by.

Opportunities • • • Increase in Government infrastructure spending Increased Investment in industrial and commercial projects Commercial construction activity has also picked up across Tier 2 and 3 cities

Threats • • • Imports from Pakistan affecting markets in North India Excessive overcapacity may affect margins as well as prices Consolidation through Mergers & Acquisitions is a major threat

Competitor Analysis: There are a lot of big companies operating in the cement industry out of which the domestic ones include Ultratech Cement, JK Cements, ACC Cements, Century Cements, India Cements, Sanghi Cements, Dalmia Cements, Saurashtra Cements and Madras Cements. Because of the increasing domestic demand of cement and the boom in the industry, many foreign players too have ventured the Indian market by establishing their presence in the Indian market and in the recent years we have seen them expanding to gain more market share. International players like Lafarge of France, Holcim of Switzerland, Heidelberg Cements of Germany and Italcementi of Italy have already established themselves in the Indian market. Holcim, which is one of the largest global players in the cement industry, has bought a major stake in the Indian brands – ACC and Ambuja Cements, which collectively account for 50% of India’s market share.

Broad Strategy: Ambuja focuses on low cost strategy. It has been able to achieve cost advantage through sourcing low priced inputs and making its processes more efficient. The company sources low priced and high quality coal from South Africa and furnace oil from the Middle East. Ambuja Cements was a pioneer in the field when they introduced the movement of cement in bulk through sea thus speeding up its transportation. The company has created a strong network of clinkerisation plants and grinding units along with a robust distribution network. The company has also built a large network of over 7,500 dealers and 20,000 retailers across 18 states in India. This strong connection between the company and the dealer network has helped Ambuja to withstand severe competition. By introducing best practices from other countries and increasing its penetration in relevant markets, the company has successfully fine tuned its product management. All these factors have caused the company to strengthen its market position and be a leading cement manufacturer in India.

Liquidity and Solvency Analysis:

Current Ratio Quick Ratio Debt Equity Ratio Long Term Debt Equity Ratio Interest Coverage Ratio Source: moneycontrol.com Following is an analysis of the short term (Liquidity Ratios) and long term (Solvency ratios) stability of the company in terms of its capability to service its debt obligations. Ratios under liquidity ratios analyzed are Current Ratio and Quick Ratio. While for Solvency ratios, we have taken D/E ratio and interest coverage ratio. The trend in their liquidity is showing a general increase over the last five years. Also their current and quick ratios are firmly in the industry average range. Thus we do not foresee problems arising from lack of liquidity. The D/E ratios are almost an industry anomaly. Barring one comparable competitors (ACC Cement) they are very low compared to industry average. Thus while the company is highly solvent both in the long and short run, a little debt would help in profitability and efficient management. Also the constant levels of debt indicate the company has not made any large capital expenditures or investments in the last five years. Similarly, we see that the Interest Cover of the company is very high compared to competitors (in the range of