Ambuja Cements' entry into the high-priced Kerala and Tamil Nadu markets won't be disruptive just yet, according to a report by analysts at brokerage Nomura.
The analysts wrote that the incumbents are well-placed and that they do not expect any pricing pressure immediately. The incumbents include Ramco Cements. In its April 16 report, Nomura issued a reduced call on Ambuja Cements, with a target price of Rs 500.
The stock closed at Rs 622 on April 16.
Ambuja Cements has entered the southern market with an agreement to acquire a grinding unit owned by an unlisted entity named My Home Group. The 1.5 MT unit is located in Thoothukudi, Tamil Nadu, and its acquisition price was around Rs 413.75 crore.
The unit spread over 61 acres, is located near the port, and analysts believe that the location will allow Ambuja to use the sea route to deliver clinker from Sanghi Industries in Gujarat, which it recently acquired.
This would be in line with the brokerage's earlier prediction that Ambuja Cements would leverage Sanghi Industries' infrastructure to enter the southern market.
Higher costs
Leveraging this infrastructure would also mean that its costs, when compared to regional peers such as Ramco Cements, would be on the higher side.
The analysts wrote, "In our view, Sanghi’s clinker manufacturing cost is marginally higher than Ramco’s RR Nagar plant. However, Sanghi’s total clinker cost to Tuticorin (Thoothukudi) GU will be almost double that of Ramco’s RR Nagar due to higher freight cost/higher clinker delivered cost."
They added, "The distance between the Sanghipuram port and the Tuticorin port is around 1,600nm while RR Nagar is an integrated unit (no clinker freight)." (nm refers to nautical miles).
Therefore, while RR Nagar would be able to generate EBITDA of Rs 1,200 per tonne, the Thoothukudi grinding unit would only be able to generate EBITDA that is less than half of that, at Rs 500 per tonne, the analysts indicated. They also pointed out that the capacity of the plant is too small to have an impact on trade pricing.
Expansion plans
That said, the Nomura analysts noted, that Ambuja Cement has expansion plans in the region once it has effectively set up a supply chain for clinker from Sanghi to the South.
On the investment in the grinding unit, the analysts wrote that the cost of acquisition was similar to setting up a greenfield unit. "It costs USD30-40/t to set up a new greenfield GU (grinding unit) with a gestation period of 12-15 months. Hence, we believe Ambuja’s acquisition of Tuticorin GU at USD33/t is a justified investment," they wrote.
They added, "The plant also has access to a 4,000MW thermal power plant that will ensure a constant supply of fly ash to the GU. We believe this asset will not only help Ambuja establish its brand in the Southern market but also help in better utilization of Sanghi’s clinker base."
The Nomura analysts expect the plant to generate around 10 percent post-tax return on capital employed (ROCE), assuming 68 percent utilization and a 1.33x cement-to-clinker ratio.
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