“Managerial Economics”

Ambuja cements

2004-2009 Financial Analysis

Presented by:Tanmay Kore 46Tarun Lalwani 47Varun Hegde 48Venkati Muttappa 49Vikram Vohra 50

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INDEX

Indian cement industry 3Nature of Indian cement industry 3Ambuja cements: 5Vision 5Mission 5Recognitions 5Products 6Consolidation strategy 6Gains for Holchim 7Production 8Sales 10Expenses 14Profits 16Reserves 17Earning per share 17Dividend per share 18Current ratio 18Total debt 19Debt equity ratio 19Debt equity ratio (competition) 20Corporate social responsibility 21Bibliography 24

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Indian cement industry:

The Indian cement industry with a total capacity of about 200 m tonnes (MT) in FY09 is the second largest market after China. Although consolidation has taken place in the Indian cement industry with the top five players controlling almost 60% of the capacity, the balance capacity still remains pretty fragmented.

Despite the fact that the Indian cement industry has clocked production of more than 100 MT for the last five years, registering a growth of nearly 9% to 10%, the per capita consumption of around 134 kgs compares poorly with the world average of over 263 kgs, and more than 950 kgs in China. This, more than anything, underlines the tremendous scope for growth in the Indian cement industry in the long term.

Nature of Indian cement industry:

Fragmented: The Indian cement industry has been characterized by a high degree of fragmentation. Currently the number of players in the domestic industry is over 50. The top 5 companies contribute about 50 per cent of the total domestic capacity, while the remaining is distributed among the 50 odd

Cyclical: Cement industry is highly cyclical in nature and depends largely on theeconomic health of the country. There is a high degree of correlation between the GDP growth and the growth in cement consumption. This can be gauged by the fact that after experiencing robust growth from 1994 to 1996, the sector was one of the worst affected due to economic slowdown during 1997 to 1999. The industry registered an impressive growth of 15 per cent during the 1999-2000 which was mainly due to demand from housing sector which accounts for 60 per cent of cement consumption, the rest accounted equally between infrastructure and industry/others.

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Standardized Technology: Cement manufacturing is a standardized and simple process, which does not offer any technological advantage to specific players. The industry is characterized by matured and stable technology with only minor improvements taking place over the years. The financial viability / profitability of a unit depends on operational efficiency (both manufacturing and marketing apart from general demand supply situation in the region. Any innovations in the manufacturing process can be easily diffused across the industry. Thus access to the latest technology is not an entry barrier for anyone entering the sector

Localized operations: Given the bulky nature of the pro duct and the resultant high freight costs, it is economical to sell in a small radius of the plant location and transporting cement beyond 250 km is economically unviable. Regional supply imbalances affect the realization and margins of individual plants. Uneven capacity expansions have intensified these imbalances in the industry. Significant capacity addition in northern / central and western India resulted in an over supply problem during past couple of years. South, which was hitherto a fairly insulated region, has started facing the problem of oversupply because of new capacities installed in the region over the last two years.

Insulated from import threat: The international trade in cement is very limited and only between the neighboring countries due to the bulky nature of cement The domestic industry is relatively insulated from import threat, mainly on account of the freight rates involved in transporting cement. The countries that export their produce to India are amongst the cement surplus countries having an access to the seas. These include mainly the East Asian countries. The countries where Indian companies like Gujarat Ambuja Cements Ltd export their product are located near Indian shores and these include Bangladesh, Nepal, Sri Lanka UAE and Mauritius

Given the high potential for growth, quite a few foreign transnationals have been eyeing the Indian markets and are planning to acquire domestic companies. Already, while companies like Lafarge, Heidelberg and Italicementi have made a couple of acquisitions, Holcim has acquired stake in domestic companies Ambuja Cements and ACC and has increased its stake gradually to gain full control. After acquiring stake in big companies, transnationals eyed median capacity producers. Italcementi acquired 100% stake in Zuari Cement and 95% stake in Shree Vishnu. Cimpor, the Portugese cement manufacturer, acquired Grasim’s stake (53.63%) in Shree Dig Vijay. However, it must be noted that the transnationals will find the going tough since cement is a game of volumes and with the median capacity of fragmented players, the transnationals will have to acquire capacities piecemeal and this route is fraught with a lot of uncertainties. The global players put together account of quarter share of the domestic market. Further, turning around few of the companies at a time when the cycle is at its peak would be a difficult task. Considering the long term growth story, fair valuations, fragmented structure of the industry and low gearing, an another wave of consolidation would not come as a surprise.

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AMBUJA CEMENTS

• Vision : To be India's most admired company.

• Mission : Delighted customers. Inspired employees. Empowered partners. Energized society

Environment protection measures that conform to the world’s best.

The pollution levels at all our cement plants are even lower than the rigorous Swiss standards of 100 mg/NM3. The air is so clean that a rose garden flourishes right next to the main plant.

Reinventing cement transportation. 

Almost 90% of cement in India traveled by rail or road. The only way to speed up transportation was a completely different approach. The result: a bulk transporting system via the sea, first companies to introduce the concept of bulk cement movement by sea in India.

Environment protection measure that conform to the worlds best.

The pollution levels at all our cement plants are even lower than the rigorous Swiss standards of 100 mg/NM3. The air is so clean that a rose garden flourishes right next to the main plant.

Recognition

National Award for commitment to quality by the Prime Minister of India.National Award for outstanding pollution control by the Prime Minister of India.ISO 9002 Quality Certification. ISO 14000 Certification for environmental systems. Economic Times - Harvard Business School Association Award for corporate excellence Best Award for highest exports by CAPEXIL.

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Products

Ordinary Port land Cement (OPC) Portland Pozzolana Cement (PPC) White Cement Portland Blast Furnace Slag Cement (PBFSC) Oil well cement Rapid hardening cement Water Proof Cement

Consolidation strategy

Established in 1986

• In 1995, GACL floated a wholly owned subsidiary in Mauritius – Cement Ambuja International Ltd. (CAIL).

• A year later, GACL floated another subsidiary, Ceylon Ambuja Cements (Private) Ltd.,

• In 1997, GACL acquired Modi Cements’ sick 1.4 mtpa plant at Raipur (Madhya Pradesh) for Rs 1.66 billion. This plant was renamed Ambuja Cement Eastern Ltd.

• In 1998, GACL acquired the Nadikudi and Proddatur limestone mines in Andhra Pradesh

• In December 1999, GACL acquired a 51% stake in Delhi based DLF Cement for Rs 3.5 billion.

• In the same month, GACL also acquired a 7.2% stake in Associated Cement Companies (ACC)

• 2001 – Private equity investors (American International Group and Government of Singapore) invested in ACIL

• 2005 – ACIL restructured as a joint venture with Holcim ACL is a Holcim Group company since May 2006

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Gains for Holchim

Holcim gains access to the second-largest cement consuming market in the world…

Holcim, the Swiss giant, is the largest supplier of cement, aggregates, and RMC in the world, with a presence in 70 countries and an equal mix in matured as well as emerging markets. Holcim’s capacity is around 156 metric tonne (mt), equal to the size of the Indian cement market. The company has grown to its current size through inorganic growth driven by aggressive acquisitions.

…access to export markets of Middle East

Holcim has a strong presence in the more mature European and American markets, whereas Asia- Pacific is more of an emerging market. Therefore, this acquisition would amount to an increase in capacity in the Asia-Pacific region, which is witnessing huge demand. The acquisition of GACL also provides Holcim with access to exports markets in the Middle East, where until now it lacked significant presence.

GACL’s strong operating efficiencies to boost Holcim’s financial profile

Along with being the third-largest player in the Indian cement industry, GACL enjoys superior operating efficiencies and a strong credit profile, which would reflect in Holcim’s financial profile.

Holcim, the last entrant into the Indian market, becomes the market leader

Holcim’s foray into the Indian market happened in January 2005 when it entered into a strategic alliance with Gujarat Ambuja and acquired a stake of 67 per cent in ACIL (the holding company of Ambujas), while GACL held on to the remaining stake. Through this strategic alliance, Holcim acquired a 34.57 per cent stake in ACC and 97 per cent in ACEL. The total investment was $800 million.Thus, in a period of one year, Holcim has invested up to $2 billion in the Indian cement industry.The aggressive acquisition strategy has put Holcim way ahead of other multinational companies (MNCs) who have had a presence in India much before Holcim’s entry. It

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now becomes the largest player in the Indian cement industry with a pan-India presence, a high market-share of 23 per cent (GACL-ACC-ACEL group), and a total capacity of 33 million tonnes (higher than the Grasim- Ultratech group).

Financials:

2005-2006 not comparable with 2004-2005

(i) Change in Accounting YearThe Accounting Year of the company has been changed to end on 31st December, 2006 instead of on 30th June, 2006. The current year, therefore, comprises of a period of 18 months as against 12 months of previous year.

(ii) Amalgamation of ACELErstwhile Ambuja Cement Eastern Limited (ACEL) has been amalgamated with the company with effect from 1st January, 2006. The figures of ACEL for its Financial Year ended on 31st December2006 (12 months) are included in the financial results of the company for the current year (18 months).

Performance analysis 2004-2008

Production:

2003-2004:

The production figures include production from the Rabriyawas plant (erstwhile Ambuja Cement Rajasthan Limited) ACRL for one month since ACRL was merged into company effective 1st June 2004

2004-05:

Looking at the growth in the Himachal Pradesh market, a cement mill of the capacity of 80 TPH was installed at Darlaghat. The commercial production of this cement mill had commenced in the month of February 2005. As a result, the

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installed capacity of the Darlaghat went up from 1.16 million tonnes, to 1.60 million tonnes.

2005-06:

The company expanded its clinker capacity by 4.5 million tonnes, cement capacity by 6 million tonnes and power generation capacity by 178 MW at different locations with total investment of Rs.3350 crores.

2007:

This growth was achieved despite serious setback in production unit at Ambujanagar – which was affected by unprecedented floods in August – September 2007. The higher cement production was due to higher blending ratio in 2007, as well as the commissioning of the new grinding facilities.

2008:

Total cement production increased by 5%, from 16.9 to 17.8 million tonnes. The increase was mainly as a result of a full year’s production at Farakka and Roorkee facilities which started in mid 2007, and commencement of grinding at Surat terminal in early 2008.

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Sales:

2003-2004:

Total sales:

1968 cr as compared to 1742 cr, a growth of 13 % (in terms of value)

Factors:Region % change in demand % change in sales Change in price per bag (Rs)Gujarat 11 - -North India 7 11 5-10Mumbai 6 26 7-8Maharashtra 4 - 10-12

Exports went up by 4 % from 218.66 cr to 226.57 Reduction in export volume from 18.34 lakh tonnes to 17.25 lakh tonnes (6 %)

because of high freight rates and tight availability of ships.

2004-2005:

Total sales, including exports, stood at 127.34 lakh tonnes, as against 104.15 lakh tonnes, an increase of 22% over the previous year.

In value terms, our sales have gone up by 33% to Rs.2606 crore, from Rs.1965 crore in the previous year.

Factors:

The prices in domestic markets went up between 4% and 10%. Whereas, export prices improved substantially by about 29% over the previous

year.

Region Change in price

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Gujarat 6 %North India 6 per bag

Mumbai 10-12 per bagMaharashtra 10 per bag

Hectic construction activity in the Middle East continued to fuel a rise in cement demand in the international markets. As a result, export prices rose by about 29% this year.

Export volumes during the year were marginally higher at 17.55 lakh tonnes, asagainst 17.25 lakh tonnes in the previous year.In spite of marginal volume growth, exports in value terms shot up to Rs.279.59 crore, as against Rs.226.57 crore in the previous year. This was due to a substantial increase in export prices.

2005-2006:

Total sales that Rs.4847.86 crore as against Rs.3296.42 crore in the previous year.Cement sales including exports stood at 16.3 million tonnes as against 14.6 million tonnes in 2005, registering a growth of 11.6%.

Export volumes went up by an impressive 28.6% to 1.8 million tonnes in 2006 from 1.4 million tonnes in 2005.Revenue from exports were Rs.383.74 crore compared with Rs.259.61 crore in 2005, an increase of 48%.

Factors

Region % change in demandGujarat 14

North India 13.6Mumbai -

Maharashtra 7

Domestic prices went up by about 28%

The demand in export markets continued to be extremely good. It has been particularly buoyant in the Middle East because of huge construction on the back of high oil prices.Export prices went up by 14% over the previous year.

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Revenue from exports were Rs.383.74 crore compared with Rs.259.61 crore in 2005, an increase of 48%.Export volumes went up by an impressive 28.6% to 1.8 million tonnes in 2006 from 1.4 million tonnes in 2005.

2007:

Overall market share of 10%. and a 7% growth in volumes.

Factors

Region % change in demandNorth India 9.5

Gujarat13.5Mumbai

Maharashtra

The company received a setback at the Gujarat plant when floods disrupted production for almost two months. However, company did a commendable job in retaining strong presence in the region at 20%. The company could achieve increased volumes by resorting to purchase of clinker from outside, diverting cement from exports to the domestic markets and increasing the blending ratio.

In view of the good domestic demand and improved realization, coupled with depreciation of the US Dollar, the company gradually reduced its export volume during the year.Total exports for the year stood at 1.3 million tonnes as against 1.8 million tonnes for 2006 - down by 28%. In 2007, our revenue from exports was Rs.277.5 crore as compared to Rs 383.7 crore in 2006.

2008:

Domestic demand (all India) grew by 9 % from 159.7 million tonnes to 176.87 million tonnes

Industry has grown by 8% compared to last year in western region. Ambuja volume growth stood at 11% and consequently there was slight increase in market share

Factors:

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Region % change in demandGujarat

8MumbaiMaharashtraNorth India 7

While in the first half of 2008, the government introduced a ban on exports and encouraged imports from Pakistan, in the second half the realty boom suddenly turned to bust. With the global economy coming to a crunching halt, funds for major housing, commercial and infrastructure projects practically dried up.

To revive demand in the real estate sector, the government introduced a slew of monetary and fiscal measures. In December, the excise duties on cement was reduced by 4% and on clinker by Rs.150 per tonne, and countervailing duties were re-imposed on imported cement.

The export ban was also fully lifted. Interest rates were lowered in a bid to boost residential housing demand.

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Expenses:

2003-2004 The cost of coal went over by 8 % over the previous year.The reasons being steep

increase in international coal prices.The indigenous coal prices were increased by 16 % in June 2004.

The total power costs came down by 6 % because of the captive power plants. The average freight costs of the company went up by 8 % over the previous year

because of the increase in diesel prices by an aggregate of 17 % during the year. Interest costs came down by 11 % over the previous year because of the high

interest cost loans and debt instruments were either swapped by low interest instruments or redeemed out of surplus cash accruals.

2004-2005 The cost of limestone and gypsum went up by 13 % and 7 % respectively. Indigenous coal prices went up by 23 % over the previous year.

The landed cost of imported coal went up by 50%. Due to increase fuel cost the cost variable cost of power generation has gone up

by 20% Freight rates went up by 5 % over the previous year.

2005-2006 The Supreme Court of India delivered a judgment in November 2005 banning

overloading of trucks across the country. Suddenly, the availability of trucks became a serious constraint. The road freight rates arising out of this decision of the Supreme Court went up by a whopping 40% during 2006.

Significant increases were at Ambujanagar and Sankrail where the power generation is based on liquid fuel. This increase is because of a surge in the price of furnace oil. At Ambujanagar the power cost went up by 32%. The power cost at Sankrail has gone up 26%.

2007 Overall average cost of coal went up by 12% over 2006. Average landed cost of

domestic coal in 2007 was up by 2%.This is primarily due to increase in royalty in

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August 2007 by an average of 15-25%, a hike in pithead prices of all the grades by 10-15% by Coal India towards the end of 2007, and minimum chargeable freight imposed by the Railways. Average landed cost of imported coal was - up by 33%.The Ministry of Coal has reduced coal linkages to cement companies, thereby forcing cement companies to source coal from e-auctions at high rates – at a minimum 30% higher than the notified price applicable on coal linkages

Average cost of power generation (grid & captive) was Rs 2.88 per unit - up by 4%. While cost of grid power went up by 2%, cost of power generation, through CPP, was at Rs 2.68 per unit - up by 5%. This was primarily due to increase in the cost of coal

2008 The cost of imported coal, representing approximately 30% of the total

requirement, further increased in the first half of 2008, having already gone up substantially in the second half of 2007. The average landed cost in 2008 (for both kiln and captive power) was 50% higher than in 2007. The cost of domestic coal also increased, as linkage supplies became unreliable, necessitating higher procurement of market / e-auction coal at a substantial premium to the linkage prices. Deterioration in the quality of domestic coal supplied continues to be an issue, and this has impacted the fuel consumption figures at certain plants.

As a result of the increase in coal cost during the year, the cost of captive generation increased by about 20%

Power consumption was slightly higher in 2008, at 86.4 kWh per tonne of cement, compared to 84.6 kWh in 2007. Requirements were higher mainly at the Bhatapara and Ambujanagar plants, due to certain inefficiencies in the grinding processes

Freight and Forwarding costs increased by 12% in absolute terms, and 7% on a per tonne sold basis. The major reasons were: a shift from export to domestic sales partly due to the export ban in mid year, and a hike in fuel prices earlier in the year when global oil prices were dramatically increasing. These increases were rolled back towards the end of the year, but too late to have any real impact in 2008.

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PROFITS

COMPETITION

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RESERVES:

EARNING PER SHARE:

eeea

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Face value Rs. 10 in 2003-2004 and Rs 2 there onwards

DIVIDEND PER SHARE:

CURRENT RATIO:

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TOTAL DEBT:

DEBT EQUITY RATIO:

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COMPETITION :

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Corporate Social Responsibility

(2003-04):

Empowering Communities

Gujarat Ambuja wanted to create rural development models that would be sustainable and replicable. Models that would involve the active participation of the people. To focus on this task the Ambuja Cement Foundation was formed by a handful of people. Their first task was to provide water for the people. This could be done by teaching people about water harvesting. Because of the peoples dedication many of the surrounding villages started using these water harvesting models. In 10 years they have replicated water harvesting, health care, education and women development tools in about 500 villages across their plants and grinding facilities in different parts of the country.

Developing and implementing programmes for Women development:

With funding help from NABARD and ACF they are encouraging women to set up Self Help Groups (SHG). They provide them with the technical assistance and marketing skills required to produce washing soaps, detergents and other provisions for the local market. Today there 155 SHG’s involving about 2000 people who pool their savings and help them for their various business ventures. One such group has formed a milk co-operative and bought its own chilling plant. Even the district officer has come forward in supporting this milk co-operative.

Ambuja Cement Foundation:

Recognized as a powerful tool of change, because of their dedicated efforts in rural development the ACF has been given the Corporate Social Responsibility Award by BUSINESS WORLD – FICCI – SEDF. When the 2001 Gujarat earthquake took place many people were homeless and jobless. The technical people of ACF helped them to train these people in doing masonry work. This team had trained 1000 workers in rural parts of Kutch and Gujarat. Impressed by these efforts CARE India and SEWA have adopted these skills to train people to do masonry work.

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2004-2005

Not just working for the people, but working with them:

The ACF team added another initiative to their agenda. The area around our Gujarat plant suffers from heavy ingress of salinity into drinking water and in the soil. To prevent salinity, a unique technique has been adopted to de link fresh water and saline water by cementing the bottom of the wells and recharging the fresh water streams. This has helped substantially improve the availability and quality of drinking water. And the improvement in the agricultural productivity has led to improved economic conditions in the area.

Contribution to rural healthcare

The villages had to have their own healthcare workers. Ambuja decided to help create the capabilities. After a careful selection of interested women - termed “tais” - and intensive training programmes every few months and continuous monitoring, these ’tais’ have proved to be the ideal solution for immediate primary diagnosis and first-aid treatment in the villages. Besides attending to cases of burns, injury, infant and child pneumonia, diarrhea, antenatal care, hypertension, etc. our ’tais’ have been responsible for curtailing epidemics of cholera and malaria, when other villages in the vicinity have fallen prey to them. Today, these women are also recognised by our District Health Officials for all their preventive work.

Fighting AIDS with a truly powerful tool:

Ambuja conducted hundreds of exhibitions, street plays, meetings and discussions, STI clinics, group and one-to-one counseling sessions, condom demonstrations, rallies and programmes. Our efforts equipped the truckers (darlaghat) and communities with necessary information about prevention and treatment. These positive experiences during the pilot phase gave them the confidence to sign an HIV/AIDS mission in August 2004.

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2005-2006

Rehabilitation of mines

Used up mines in Gujarat have been converted into a network of reservoirs. With large scale reforestation and horticulture, these areas have transformed into scenic picnic spots and a habitat for different bird species. A number of check dams and check filters have been constructed in mining and surrounding areas for water quality management. In addition to this, trees have been planted in the check dams and check filters areas to arrest soil erosion

Developing natural resources

In Junagadh District of Gujarat the ground water was nearing depletion and the livelihood of the farming community was critically affected by salinity ingress. Extensive and innovative water harvesting programmes by the Foundation have resulted in increasing the water table and helping fight salinity. ACF has embarked on a major project to connect water bodies with link canals.

2007

Alternate livelihoods: Skill enhancement for a brighter future

Through intensive training programmes, ambuja has introduced farmers to better technologies and cropping techniques, increasing their yield in agro-based livelihoods. Expansion into alternative livelihood options meant sustained incomes for the families, which in turn directly influenced the standard of living of the family. Moreover, as agriculture is a seasonal activity, it is easily possible for a family to engage in an alternate occupation during the lean months.

Village self-reliance: New inroads into community health

Ambujas efforts in training and empowering “tais”, or village health functionaries, are an important part of their inroads into community health. They have been consistently

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providing primary health care to the villagers. They have increased their responsibilities to include pre-natal care and the care of new born infants. Their active monitoring of new-born infants and the expectant mothers has helped in bringing down the infant mortality rate in the villages. They continue to provide medical help to the villagers refer serious cases to hospitals, assist the mobile dispensary operated by the company during its regular visits and conduct sessions in their own communities on preventive health education.

2008

Stakeholder Engagement:

The Foundation believes it is critical to identify individuals and groups in the local communities directly or indirectly affected by the Company operations and to engage with them in a continuous dialogue. ACF have commissioned a reputed external agency ERM to conduct Social Impact Assessments (SIAs) at all new Company sites. The findings of this agency have enabled ACF to be sensitive to the possible social impacts created by the Company operations by addressing effectively the concerns and views of those affected in the draft rehabilitation plans. This extensive exercise has already been completed at two locations- Marwar- Mundwa in Rajasthan and Nalagarh in Himachal Pradesh during 2008.Community Development: ACL is committed to the development of the communities where it operates. Through its varied community development initiatives, the ACF reaches out to approximately 607 villages catering to a population of over 11 lakhs. The community development activities include health care, improvements in quality of education, infrastructure development, livelihood generation, women's development, formation of self-help groups for women and the like. In education, Basti schools- informal schools for out of school children in Bhatinda, have arisen to prominence due to their commendable work in the last year. The schools try to provide bridge education to out of school children and attempt to bring them into the mainstream formal education system.

BIBLIOGRAPHY:

http://www.gujaratambuja.com/Guj-Ambu-ar08-full.pdfhttp://www.gujaratambuja.com/AR_2007.pdfhttp://www.gujaratambuja.com/Annual%20Report%202005-06.pdfhttp://www.gujaratambuja.com/Ambuja%20AR%20-%202005.pdfhttp://www.gujaratambuja.com/gacl0304.pdf

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Financials and ratios

http://www.moneycontrol.com/financials/ambujacements/results/yearly/AC18http://www.moneycontrol.com/stocks/company_info/print_main.phphttp://www.moneycontrol.com/competition/ambujacements/comparison/AC18http://www.moneycontrol.com/competition/ambujacements/comparison/AC18

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