Lafarge Holcim’s second Indian unit, Ambuja Cements, saw a challenging calendar year 2020. The company, along with the industry, suffered due to the stoppage of construction activity in the Covid-19 pandemic and subsequent lockdowns last year which impacted production as well as sales in Q2 CY20. Surprisingly, in the next few quarters sales picked up due to strong demand from rural and urban housing and from the infrastructure sector. 

The cement sector’s prospects are rising on higher budgetary allocation by the government on infrastructure and lower interest rates. There is also an expectation of recovery in private capex, which would continue to support strong cement demand. Ambuja Cements’ product portfolio includes high-strength and high performance Portland Pozzolana Cement (PPC), Ordinary Portland Cement (OPC) and Blended cement, across various grades. Special products, a high margin segment, contributed 12% to the sales volume this quarter. 

The measures Ambuja Cements took over the past few quarters to adapt to life under the pandemic seems to have borne fruit with optimised costs resulting in higher realisations per tonne in Q1 CY21.

Quick Takes

• Revenue stood at Rs 7,812 crores, rising  22.2% on a YoY basis, while net profit rose nearly 71% YoY to Rs 947.2 crores. 

• Operating profit grew 54.3% on a YoY basis, with the company posting the highest operating profit in the past 10 quarters of Rs 1,838.5 crores

• Efficiency of production continues this quarter with more than 96% capacity utilisation

• Increased penetration of premium/special cement with higher margins has been driving growth for the company

Growing revenues with consistently growing demand

Sales volumes grew by 25.6% for the quarter with sales growth across geographies. This was further helped by realisations per tonne rising to Rs 4,945 in Q1 CY21 compared to Rs 4,792 for Q1 CY20, at 3.2% rise on a YoY basis.

The management of Ambuja Cements said that there are strong and continuing headwinds due to prices of inputs like coal, petcoke, and diesel. The company has made some progress on improving its internal efficiencies. This will help it limit any spike in costs.

Growth from India in the last quarter was strong, and helped push up the sales volume for Ambuja Cements. The company’s special products business (created jointly with LafargeHolcim), also contributed to its revenue growth.

Better operational efficiency and improved realisations

Ambuja Cements employed various measures to control costs over the past few quarters. It has implemented a new system to track production and plant maintenance in real time. Maintenance is conducted using predictive models, to minimise maintenance costs, and reduce the machinery’s down time. This means the machines  are available for production longer, which leads to higher volumes that can help defray costs over a larger base. These measures have helped boost its capacity utilisation to 96%. 

Similarly, a new system implemented to manage its logistics needs has helped Ambuja Cements transform its supply chain. It uses the manufacturing location that allows it to minimise the cost of distribution to end customers. This way, the cost of servicing any order is minimised. All of this resulted in a net reduction of 5% on account of better production control, logistics and distribution.

Capacity expansion through new plants and acquisitions

Ambuja Cements has a stated objective to reach a production capacity of 50 MTPA (million tonnes per annum) from the current capacity of 29.65 MTPA. In terms of regions, the company is exploring opportunities in markets of east and west India, with brownfield expansions in Bhatpara and Maratha plants. Apart from this, the company is also looking at significant debottlenecking opportunities across all its plants to further enhance their cement capacity. With current capacity utilisation above 90%, further capacity addition is a part of the strategy to gain market share across regions and subsequently improve market share.

The company has been in the process of constructing a greenfield integrated plant at Marwar Munda, Nagaur, Rajastahan. This plant would have 3 MTPA clinker units and an 1.8 MTPA cement unit. The planning and approval for this plant was done in 2018. As per the original plans, it was supposed to be operational towards the end of year 2020. However the Covid-19 situation in year 2020 slowed down the construction and as per management, the plant is now expected to commence production in Q3 CY21. This would add incremental sales subsequently.

Shrinking market share due to capacity constraints

Although India is among the leading producers of cement in the world, its per capita cement consumption, at 200-250 kg, is the lowest among developing countries. The world average is 500-580 kg, with per capita consumption higher in countries such as Vietnam (800-850 kg) and Turkey (700-750 kg). The factors that could trigger cement sales are infrastructure demand, especially for government projects, as well as higher housing demand in rural and semi-urban areas. Ambuja Cements ranks second in India in terms of market share in the cement sector. 

This sector is dominated by 5 companies which account for more than 50% of the market share. Of these 5, Ambuja Cements (6.2%) and ACC (6.0%), both are a part of the LafargeHolcim group and together account for approx 12% of the share in the industry. 

As per available data, the market share of Ambuja Cements has fallen from 8.6% in 2018 to 6.2% in 2020. While the gap between the leader Ultratech Cement (21.4%)and Ambuja Cements (6.2%) is large, this can reduce once they commission newer plants to increase sales volume and subsequently market share.

At the time of release of the Q2 CY21 results, we are again facing the ferocity of the second wave of Covid-19. There is limited construction activity with major lockdown-like conditions across the country. In the near term, while the demand for cement is strong, construction activity is slowing down and we need to watch the next quarter results closely to gauge the impact. However, in the long term, Ambuja Cements seems poised to benefit from its initiatives on operational efficiency and capacity expansion.