India is the second largest producer of cement in the world. Availability of raw materials like limestone and coal make India a desirable destination for cement production.
That is why many international firms such as Holcim Group and Heidelberg Cement, have invested in the Indian cement industry.
According to the India Brand Equity Foundation (IBEF) report, India has more than 7% of the world’s installed cement capacity.
Ambuja Cement and UltraTech Cement are two of the well-known players in this industry.
In this article, we compare these two companies based on their operational efficiency, profitability, and their future growth prospects.
Business Overview
Ambuja Cement is a part of the Holcim Group (formerly known as LafargeHolcim), a global leader in providing green building solutions in 70 markets across five continents.
Ambuja Cement’s unique product portfolio is tailor made to suit Indian climatic conditions. The company is the industry leader in using both natural and man-made resources responsibly and has been awarded several accolades for the same.
UltraTech Cement is a part of the Aditya Birla Group and is the largest manufacturer of grey cement, ready mix concrete (RMC), and white cement in India.
It’s the third largest cement producer in the world and the only company to have 100+ million tonnes per annum (MTPA) production capacity in a single country (excluding China).
The company offers products that can be used in various aspects from foundation to finish namely, cement, white cement, building products and other building solutions to both domestic and international markets.
It’s the first company to set up a retail store, UltraTech building solutions (UBS), for offering a complete range of products and building solutions for home builders under one roof.
Ambuja Cement and UltraTech Cement are offering innovative products and services to the end user and locking horns with each other to gain market share.
Ambuja Cement follows a calendar year format (ending 31 December) for reporting their financials, while UltraTech Cement follows the financial year (ending 31 March).
Double-digit revenue growth for UltraTech Cement (CAGR)
Revenues for Ambuja Cement grew at a CAGR of 6.9% in the last five years (2017-2021). Whereas UltraTech’s revenue grew at a CAGR of 14.9%.
UltraTech Cement is also leading in terms of sales volume. On an average, the sales volume is almost 3 times higher than Ambuja Cement in the last five years.
Despite the pandemic, UltraTech Cement’s sales grew at 5% while Ambuja Cement’s sales declined by 6%.
The growth in the last five years was due to strong institutional demand in the initial two years and housing and rural demand in the last three years.
Healthy profit margins
Operating profit is the income earned from the core business. It doesn’t include any non-operating income like interest income.
In case of Ambuja Cement and UltraTech Cement, it’s the profit earned from selling cement.
The five-year average operating profit margin for Ambuja Cement and UltraTech Cement is 17.4% and 21.5%, respectively. Better volume growth of UltraTech led to higher operating margins.
Though the net profit for Ambuja Cement grew at a CAGR of 16.8% against UltraTech’s 15.7% in the last five years, both the companies’ five-year average net profit margin is around 10%.
Lower expenses due to cost cutting initiatives taken by both the companies have driven the margins.
Despite the increase in price of raw materials like pet coke and diesel, the total cost for the companies hasn’t gone up due to efficient management of raw materials.
Manufacturing capacity
UltraTech Cement has an installed capacity of 117.95 MTPA of grey cement and 1.5 MTPA of white cement. Whereas Ambuja Cement’s installed capacity is just 25% of UltraTech’s at 29.65 MTPA spread across five integrated plants and eight grinding units.
UltraTech Cement has 22 integrated manufacturing units, 27 grinding units, one clinkerisation unit, seven bulk packaging terminals, and 130 RMC plants across India, Sri Lanka, and other countries.
The company has been increasing its production capacity by organic and inorganic growth (acquisitions) to become the third largest cement manufacturer in the world (excluding China).
It has announced an expansion of 12.8 MTPA in December 2020 to increase its manufacturing capacity by 10%. Whereas, Ambuja Cement aims to reach an installed capacity of 50 MTPA in the medium term.
In the year 2021, Ambuja Cement could achieve a capacity utilisation of 75%, while UltraTech reached a capacity utilisation of 99% in March 2021.
Distribution network
UltraTech Cement has a strong distribution network of one lakh channel partners with more than 80% market reach across India. It also has a network of 2,500 retail chain stores of UBS, which is a one-stop-shop solution for home building.
Ambuja Cement, on the other hand, has a network of 50,000 channel partners and 30 Ambuja Knowledge Centers (AKCs), a knowledge sharing platform for construction professionals across India.
Low dividends due to high capex
When a company earns profits, it either retains the profit or distributes it to the shareholder in the form of dividend, or does a combination of both.
The five-year average dividend payout ratio for Ambuja Cement and UltraTech Cement is 42.5% and 12.5%, respectively.
Dividend yield measures the income from holding a share. The five-year average dividend yield for Ambuja Cement and Ultratech Cement is 2.5% and 0.4% respectively.
The dividend payout and dividend yields are slightly higher for Ambuja Cement, mainly due to a special dividend the company announced during the calendar year 2020.
However, both the companies have lower dividend yield, mainly due to higher capex investments done by them in the past few years.
Inventory Days
Days sales in inventory, also known as inventory days, is a measure of time taken by the company to convert its inventory into sales.
The five-year average inventory days for Ambuja cement and UltraTech Cement is 51 days and 102 days respectively.
This means Ambuja Cement takes 51 days to convert their inventory into sales while UltraTech cement is taking double the time.
Clearly, Ambuja Cement is doing a better job at inventory management and sales performance. However, the sales volume for UltraTech Cement is high and hence requires them to stock up on raw materials.
Stocking up on raw materials has also benefited them to reduce their cost of production despite increase in input costs.
Debt to equity ratio
The debt-to-equity ratio shows how much leverage a company is using. The lower the debt, the better the risk profile of the company.
Ambuja Cement is a debt free company. It’s strong cash flows and efficient management of working capital are helping the company stay debt-free.
UltraTech Cement, on the other hand, has taken debt to fund its capex.
However, from the past two fiscals, the company has been concentrating on deleveraging. Strong cash flows have led to prepayment of debt.
Return on capital employed (ROCE)
Return on capital employed measures the company’s efficiency in generating profits from the capital invested.
The five-year average ROCE for Ambuja Cement and UltraTech Cement is 14.8% and 13.1% respectively.
Ambuja Cement is doing a better job at generating profits on the capital invested than UltraTech Cement.
Valuations
Price to Earnings ratio (P/E) and Price to Book Value (P/BV) are valuation ratios used by analysts to determine the relative value of a stock.
PE ratio uses the company’s earnings to determine how much a shareholder is willing to invest against one rupee of earnings.
PB ratio, on the other hand, uses a company's book value to determine how much a shareholder is willing to pay against one rupee of book value.
The PE and PB ratios for Ambuja Cement stood at 13.1 and 1.8 respectively. For the last five years, the average is 20.5 and 2.1 respectively.
Whereas, for UltraTech Cement, the PE and PB stood at 26.4 and 3.3 respectively. The five-year average is 35.7 and 3.7 respectively.
Ultratech Cement is slightly overpriced than Ambuja Cement. However, both the shares are trading below their five-year average, indicating they are slightly cheaper than their five-year average.
Another valuation that is unique to capital intensive industries in EV/tonne. It shows how much capital is required to produce one tonne of cement.
The lower the number, the cheaper it is, making it a better choice for a takeover.
UltraTech Cement is cheaper than Ambuja Cement, making it a better option for a takeover in the near term.
Sustainability efforts
Cement industry is one of the core sectors in India and requires companies to practice sustainability to reduce their carbon footprint.
Ambuja Cement, though much smaller in terms of manufacturing capacity than UltraTech Cement, is carefully and responsibly using resources. It has also been certified as 8x water positive, and is also plastic negative. The company has also generated 7.1% of its power needs from renewable resources. It focuses on further increasing this number in the coming years.
UltraTech Cement on the other hand aims to be 5x water positive by 2023, it is currently at 3.9x. It has been continuously making efforts to reduce carbon emissions, increase the use of alternative fuels and green power capacity which is at 13% currently.
Impact of Covid-19
Being a part of the manufacturing sector, the lockdown impacted the production and sales of Ambuja Cement and UltraTech Cement.
The cement industry saw a de-growth of 11% in volumes due to the pandemic and Ambuja Cement saw a degrowth in volumes to an extent of 6%. Whereas, UltraTech Cement saw a 5% increase in volumes backed by a strong rebound of demand in the second half.
Ambuja Cement adopted a strategy of ‘health, cost, and cash’ to mitigate immediate risk. The company could cut costs, increase its cash flows and profit margins despite a decline in the revenues by 2%. However, the construction of the new plant was affected due to an acute shortage of labour.
UltraTech Cement maintained healthy cash flows during the year, and avoided costs due to lockdown. It also managed to prepay a long-term debt to an extent of ₹50 bn. This led to reduction in finance costs and expansion of net margin.
Once the unlocking took place, both Ultratech Cement and Ambuja Cement saw a strong rebound in demand compensating for the lockdown.
Prospects look bright
Though India is the second largest producer of cement, the per capita consumption is 235 kg, which is much lesser than the global average of over 500 kg.
This indicates that the cement industry has a significant growth opportunity.
The Indian cement industry saw a strong rebound in demand since the lockdown restrictions were lifted.
Government initiatives like ‘Housing for All’, availability of capital at lower interest rates and government efforts towards building infrastructure in the country are some of the demand drivers of the industry.
Both the companies saw their sales volumes grow due to strong rural demand, and housing demand in the last couple of years.
With a huge push from the budget towards infrastructure, the companies are expecting their volumes to grow significantly. Hence, they are investing majorly towards capex to capture the growing demand.
ACC Cement, a subsidiary of Ambuja Cement, is another well-known brand in the cement space. Both the companies have been operating together, optimising their production capacity and benefiting from operational and financial synergies.
However, with a huge manufacturing capacity, UltraTech Cement has better prospects of capitalising on rising demand for cement than Ambuja Cement and ACC Cement.
Also, diesel and pet coke prices are rising, increasing the cost of production for the companies. To not put pressure on the margins, the companies have been hiking their prices.
Hence, one can expect the companies to maintain healthy margins, despite rise in input costs.
Equitymaster’s view
We reached out to Tanushree Banerjee, Co-head of Research at Equitymaster for her view on both companies. Here’s what she had to say...
Although cement companies have been a big beneficiary of the sharp recovery in realty sector, cost pressures have kept their margins tepid for a while.
With cost pressures easing off, the cement companies could see some margin upside in next few quarters.
Plus, cement companies in India remain strong beneficiaries of the megatrends in infrastructure and corporate capex.
Which is better?
UltraTech Cement is leading in terms of revenue and volume growth mainly due to a higher installed capacity.
In terms of operating profit margin, Ambuja cement isn’t far too behind UltraTech Cement.
However, in terms of net margins, Ambuja Cement is leading mainly due to low finance costs as it is a zero-debt company.
Ambuja Cement is also giving better returns on capital than UltraTech Cement. But, in terms of dividend payment, both the companies are equal.
In a manufacturing company, capex and capacity utilisation are very crucial as they indicate a company’s ability to capitalise on growing demand.
UltraTech Cement is aggressively expanding its capex to meet the rising demand. It also has a higher capacity utilisation rate than Ambuja Cement indicating a strong growth in business.
In terms of valuation, UltraTech Cement’s shares are slightly costlier than Ambuja Cement shares. However, when compared to their five-year averages, both look underpriced.
UltraTech Cement seems to have a better edge over Ambuja Cement in terms of production and sales of cement.
Rising prices of raw materials can lead to operational inefficiency if cement prices remain the same.
Lower debt of Ambuja Cement, on the other hand, can give a higher ROCE in the medium term. However, heavy capex is required in the future if it wishes to reach anywhere close to UltraTech Cement’s production capacity.
Before you choose a stock to invest, take a look at each of the company’s fundamentals and valuations. They help in deciding which company is better for investment.
Still confused which is better?
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Ambuja Cement vs UltraTech Cement
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This article is syndicated from Equitymaster.com
