Gujarat Ambuja Cement (GACL) alongwith L&T are two of the least cost cement producers in the world. One of the biggest advantages enjoyed by GACL is utilisation of fiscal incentives like the sales tax exemption and freight subsidy. The freight subsidy is in Himachal Pradesh and is available to ACC as well.

The Gajambuja unit (II lines of 1 mtpa each) in Gujarat enjoys sales tax exemption for the sale of cement within the state and sells almost the entire output to Gujarat. This obviously results in a price advantage compared to other units which even have the deferral benefit.

The Ambuja unit (1 mtpa) enjoys the benefit of deferral and hence mainly serves the Mumbai market (almost 80 per cent of the despatches ), Rajasthan (9 per cent) and Kerala (7 per cent) by paying a CST of 4 per cent.

However, the software profitability of Ambuja cannot be attributed to the sales tax incentive alone. In Gujarat, the state which charges the highest power tariff, the contract demand of Ambuja with Gujarat Electricity Board (GEB) is just 13 MW. This is important because having DG sets and a contract demand with SEB does not make much sense as the demand charges will result in marginal savings in the direct cost.

Ambuja’s major competitor in Gujarat is L&T which has opted for a sales tax deferral and surprisingly is planning a naphtha based captive power plant. The naphtha price will result in L&T not being able to compete with Ambuja on the direct cost front in Gujarat and, the sales tax deferral is another disadvantage.

Further, the freight advantage will ensure that despite being priced Rs 2 per bag lower, Ambuja’s Gujarat unit will be the most profitable compared to any other unit in the state.

The hike in petro-products prices will also push up the costs of captive power and freight unless, the company manages to cut down on the power consumed per unit of cement produced and/or improve volumes substantially. It is estimated that in the worst case, the company’s power bill will not increase by more than Rs 25 crore for the current year.

According to the presentation made by the Ambuja management at a recently held analyst meet, the company’s net worth for 2001-02 will be Rs 1,800 crore (Rs 1,048 crore as on June 1999).

Assuming that the dividend will be maintained at the rate of Rs 7 per share on the enhanced equity, cumulative PAT in the next three years will be Rs 982.72 crore. Even this figure is conservative for two reasons. One, as Ambuja proposes to set up an additional 4 million tonne capacity by September 2001 at a capital cost of Rs 1,000 crore and, the cement terminal and grinding unit at Sri Lanka will require Rs 105 crore. Capex necessarily results in miscellaneous expenditure assumed to be 5 per cent of the Capex (Rs 50 crore).

Net worth for the future years is calculated by adding to the existing net worth, net profit adjusted for dividend outgo and miscellaneous expenditure which is to be written off over a period of eight years. Here it means that GACL’s cumulative PAT for the next three years will have to be at least Rs 18.75 crore.

Hence, effectively the company’s cumulative PAT for the next three years will be Rs 1,001.50 crore. This means that addition to free reserves will be Rs 692.44 crore. Reserves, as on June 1999, was Rs 979.15 crore which includes Rs 388.27 crore of share premium which is not profit earned by company.

Effectively what the company is saying that addition to free reserves after paying the highest dividend per share ever, in the next three years will be more than what has been added since inception in 1986.

The second reason as to why the projections are conservative is that the clinkering capacity in Gujarat is being hiked by 1 mtpa (1,000 tpd for each of the three kilns) and will be operational by July 2000. Further, the grinding unit at Sri Lanka, which will source clinker from Gujarat, will also be operational in September 2001.

In the intermediate period, clinker will be ground and hence, an additional cement capacity of 0.7 million tonne (assuming 70 per cent capacity utilisation in the first year) will be created.

Hence, unless Ambuja decides to operate at not more than 100 per cent resulting in same production as in 1998-99, sales and as a result PAT will also improve. If the first quarter result and the 1:1 bonus is any indication, the company’s PAT in 1999-2000 will be at least 100 per cent higher than in the previous year.

The book value of investments, as on June 1999, was Rs 265.53 crore including investment in subsidiaries of Rs 191.94 crore. Hence, sale of investment is not likely to raise great amount of cash.