After a challenging year, the cement sector is likely to witness a recovery in margins on the back of better demand and softening of operating costs.
Grasim Industries vs Ambuja Cements: Which is a better long-term investment?
- While Grasim Industries has gained 3 percent in the last 1 year, Ambuja Cements has outperformed massively, rising over 20 percent in this period.
“The cement industry is expected to continue to ride on a healthy demand environment over the near to medium term aided by expedited pre-election government spend, continued focus of government on infrastructure development and sustained demand from the residential housing segment,” Sharekhan said in a report.
Amid this backdrop, let's analyse, between Ambuja Cements and Grasim Industries, which cement stock has better long-term investment opportunities.
Stock price trend
While Grasim Industries has gained 3 percent in the last 1 year, Ambuja Cements has outperformed massively, rising over 20 percent in this period. However, on a year-to-date (YTD) basis, Grasim is a better performer, down nearly 4 percent as against an over 27 percent fall in Ambuja Cements.
Grasim advanced 3.4 percent in March after a 0.7 percent and 7.7 percent decline in February and January, respectively. Ambuja Cements, on the other hand, rose around 7 percent in March but shed 14.7 percent and 23.4 percent in February and January, respectively.
In 2022, Grasim gained 6.5 percent whereas Ambuja surged 39 percent.
Meanwhile, from its COVID low of ₹382.83, hit in March 2020, Grasim has jumped 333 percent. Ambuja has also given multi-bagger return from its COVID low of ₹136.55, but is less than that of Grasim. It has risen 178 percent since March 2020.
Grasim hit its 52-week high of ₹1,839 in December 2022 and a 52-week low of ₹1,276.90 in June 2022. Ambuja also hit its 52-week high of ₹598 in December 2022 and a 52-week low of ₹303 in April 2022.
About the firms
Grasim Industries Limited is an Indian manufacturing company based in Mumbai. Since its inception in 1947 as a textile manufacturer, Grasim has diversified into textile raw materials like viscose staple fiber (VSF) and viscose filament yarn, chemicals and insulators, along with cement and financial services through its subsidiaries UltraTech Cement and Aditya Birla Capital respectively. The company is a part of the Aditya Birla Group. Grasim is the world's largest producer of viscose rayon fiber with about 24 percent market share. Textiles and related products contribute to 15 percent of the group's turnover.
Ambuja Cements is an India-based cement manufacturing company. The principal business of the Company is the manufacturing and sale of cement and cement-related products. The Company with its subsidiary ACC Ltd. has a capacity of over 67.5 million tons with fourteen integrated cement manufacturing plants and sixteen cement grinding units across the country. The company had entered into a strategic partnership with Holcim, the second-largest cement manufacturer in the world from 2006. From 2010 to 2022, Holcim held a 61.62 percent controlling stake in Ambuja Cements. In 2022, Holcim announced that it would exit from the Indian market after 17 years of operations and listed its stakes in Ambuja Cements and ACC for sale. Later last year, Adani Group acquired Holcim's stake in Ambuja Cements and ACC for $10.5 billion.
In the December quarter, Grasim Industries reported a 44 percent rise in consolidated net profit at ₹2,516 crore versus ₹1,746 crore in the year-ago period. Its revenue from operations, meanwhile, jumped 17 percent YoY to ₹28,638 crore in the quarter under review against ₹24,402 crore in the corresponding quarter of last year.
Ambuja Cements, on the other hand, reported a 13 percent rise in its consolidated net profit to ₹488 crore in the December 2022 quarter versus ₹431 crore in the same quarter last year. Its revenue from operations grew just 4 percent to ₹8,036 crore for the quarter under review as against ₹7,710 crore in the corresponding quarter of last year.
Which is a better long-term investment?
Uttam Kumar Srimal, Senior Research Analyst, Axis Securities, has picked Ambuja between the two.
"Ambuja Cement is expanding its capacity to meet the growing Cement demand, and it has outlined its expansion program to take the total capacity of both Ambuja and ACC combined to 140 MTPA from the current 68 MTPA by FY28. The company aims to fund its expansion through internal accruals. The company is also working on many synergies with other Adani group companies to optimize logistics, fuel sourcing, and integration between the two companies. It is expecting to improve its EBITDA/tonne by ₹300-400 in FY24 on the back of the above synergies. We are positive about the growth prospect of the company, and currently, we have a BUY rating on the company," said Srimal.
Vinit Bolinjkar, Head of Research, Ventura Securities, on the other hand, has a contrary opinion and prefers Grasim between the two.
Bolinjkar noted that Grasim is the holding company of UltraTech Cement which is the largest manufacturer of grey cement, Ready Mix Concrete (RMC) and white cement in India. The company has a consolidated capacity of 116.75 Million Tonnes Per Annum (MTPA) of grey cement.
According to Bolinjkar, UltraTech is in a huge expansion phase and Phase I of the expansion (19.9 mtpa) is in full swing and is expected to be completed by 4QFY23. The total installed capacity would be 131.25mtpa by the end of FY23, and 153.85mtpa by FY25-26. All the expansion is expected to be funded via internal accruals. Total capex is pegged at USD 76/ton ( ₹129bn), much lower than the industry average replacement cost of USD 110-120/ton, it noted.
Meanwhile, Grasim’s Paints’ facilities' construction progress remains on track across all six plant locations for paints segment entry. The commercial launch is scheduled for Q4FY24, as per plan. Overall capex spent till Dec-22 is ₹1,820 crore (vs targeted capex of ₹10,000 crore). Grasim is trading at 10.6x FY26 EV/EBITDA, added the expert.
Nirav Karkera, Head of Research at Fisdom, however, likes both firms.
"Grasim Industries and Ambuja Cements are well-known names in India's cement industry, with solid fundamentals. However, Ambuja Cements' stock performance in YTD 2023 has been lackluster due to a negative report targeting the Adani Group by Hindenburg. In contrast, Grasim's stock performance has been moderate. However, Grasim's subsidiary, UltraTech, has outperformed in YTD 2023. Considering favourable macroeconomics for the entire sector and strong fundamentals, both companies hold strong promise," said Karkera.
The near-term journey with Ambuja Cements may be choppy but the same is expected to open opportunities and drive stronger performance success for investors, it highlighted. Regarding Grasim Industries, he notes that although its Q3FY23 earnings were below expectations, it is well-positioned for a bright future. Several factors may drive growth in its standalone business and key subsidiary, UltraTech.
"The increasing demand for textiles in China is a significant factor that may create a favourable environment for Grasim's Viscose business and lead to gradual improvement in pricing. Additionally, Grasim's chemical business is performing well, and the company is poised to benefit from the accelerated growth in the paint industry. Furthermore, UltraTech, is likely to benefit from the high demand for infrastructure investments led by the government. However, there are concerns about the uncertain macroeconomic environment and the rising input costs, and it is essential to remain vigilant. Despite these challenges, the strong growth prospects in both Grasim's standalone and subsidiary businesses lead us to maintain a positive outlook for the company," he explained.
Karkera highlighted that the cement industry has experienced various challenges over the past year, particularly in the second quarter of FY23. However, the industry has shown signs of improvement in the third quarter with a quarter-on-quarter increase in profitability and he expects this trend to continue in the fourth quarter due to several factors, including increased volume and decreased cost pressure.
Moreover, the industry's demand is expected to remain healthy, driven by various factors such as pre-election spending, government infrastructure expenditure, and sustained momentum in the residential housing sector. Another significant factor that may contribute to the improvement in profitability is the decline in coal and petcoke prices since Q3FY23, leading to lower power and fuel costs for the industry, he added.
Although the cement industry has made progress in recent quarters, some challenges still need to be addressed. "One of these challenges is the uncertain macroeconomic environment, which could negatively impact the industry's performance. Another issue to consider is the increase in input costs, including raw materials, labour, and transportation, which may have an impact on the industry's margins," he cautioned. Despite mixed performance by cement stocks in the past three months, there is still optimism about the industry's growth prospects and his preferred picks are Grasim Industries and Shree Cement.
Going ahead, Srimal of Axis believes that the overall cement demand is expected to remain robust, backed by higher govt capex on infrastructure and housing and increased real estate demand. Pre-election spending will also keep cement demand at an elevated level. He expects the overall industry to grow between 7 and 8 percent in FY24 and remains positive on the sector. His preferred picks are Dalmia Bharat Limited, Ambuja Cement, JK Lakshmi, and Star Cement.
Bolinjkar also stated that energy costs in Q4FY23 are expected to reduce, led by the recent decline in fuel prices. However, he expects energy costs to remain elevated in the long run due to petcoke scarcity.
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