1/27/2016

Interim Report - II
Strategic Management Project

19
0027/52
Akancha Anima Tirkey

20
0040/52
Amerla Giridhar

21
Group-4
0052/52
Ananth Babu L

22
0058/52
Anisetty Naga Rohith

23
FP/07/15
Himanshi Rajora

24
FP/12/15
Shalini

Reasons for differing with the Analyst

We would like to change the analyst rating of Ambuja Cements to SELL from HOLD. We have
identified some of the key reasons for the same.
Growth prospects of the cement industry Not so attractive:
Overall the demand growth is showing a decline due to slowdown of economy. Supply continues
to exceed demand. The cement industry cranked up 119 million tonnes (mt) of incremental
capacities over the past five years versus ~78 mt over FY05-10, anticipating super-high demand.
However, the expected demand failed to fructify, triggering overcapacity, with utilization rates
plummeting from 89% in FY10 to 74% in FY15. Currently, utilization levels for the cement
sector are close to a historical bottom at around 70%.
Through there are many government schemes which boosts spending and demand for cement,
How much of that translates into action on the ground remains to be seen. Unless the core
manufacturing and infra sectors post robust growth, the cement sector will continue to be
unattractive for investors.
1. Looking over the Resource based analysis, it holds that though Ambuja had been an
initiator in many of its resource categories, the resources as of now have not remained
rare to the company. In this context it would be difficult for Ambuja to create and add
value out of its resources which are not unique to drive a wedge between costs and
profits. In the current scenario where it faces tough competition with other big players
like Ultra Tech, Shree Cement etc. there would be fierce race for market share. With
focus on capacity addition, many small/medium players have been able to capture more
market share and consolidate their position in the last two years. Lack of product
differentiation may also pave way for price wars and intense competition in the near
future. Also if we look in the global context Ambuja lacks in capacity problems. It
exports cement to only a limited number of countries, as compared to its global
competitors. Also it deals primarily with cement and concrete while many global players
manufacture other construction materials along with cement to provide a diverse
portfolio to the customers. Additionally increasing cost of raw materials, logistics and
power have added to the already existing threats for the cement producer. Hence
considering all these facts it seems Ambuja is in stand of only a temporary competitive
advantage which it may further lose out to its competitors owing to fierce competitive
rivalry and conditions of price war which may sprawl up in near future and hence may
register losses.
2. Similarly, based on the Value Chain Analysis we did for Ambuja cements, we can
clearly see that they follow similar mechanisms as other firms in the Indian market in
terms of logistics, operations and marketing, human resources. Though they have a bit of
competitive advantage in terms of technology for cements outbound logistics the model
is easily replicable and slowly firms have started using it. They are into R&D but not
have brought any differentiation to their product mix still and thus have little advantage
in terms of their product differentiation also. When other firms like Ultra tech have

clearly more market share than them and since the market is sticky its difficult for them
to compete with the top players currently so they don't have any competitive advantage
over other firms in near future. Hence its advised to sell rather than to hold the shares.
Ambiguous Management:
The lack of clear policies on Indian operations post the global merger of Holcim and Lafarge can
be seen as a key risk. Currently, there is news going around saying, French cement maker
Lafarge SA has decided to sell all its assets in India. Meanwhile, the proposed change in
structure of holding of ACC and Ambuja under the Holcim Group, is also pending approval of
the Foreign Investment Promotion Board (FIPB) and, hence, lacks clarity.
Key Financials continue to take a downward turn:
Ambuja did not have an impressive top line performance (9911 cr to 9368 cr) in FY'15. This
resulted in steep decline in bottom line of the firm by 688 cr (1496 cr to 808 cr), impacted by
weak demand and fall in realization.
The EPS(5.2) and P/E ratio (37.2) of the company is poor with respect to the competitor firms,
which suggests that shareholders are not willing to pay more for an unit of earning as compared
to UltraTech or Shree, and the company is undervalued in the market.
Realization was down by around 5%, due to pricing pressure in its key markets of North and
West regions.
Profits were lower due to a weak operating performance coupled with higher depreciation
expenses and lower other income.
The estimated growth rates for both the Cement industry as well as Ambuja Cements remains to
be negative.