Best Cement Stock: Ambuja Cement vs UltraTech Cement

India is the second-largest manufacturer of cement in the world, accounting for over 7% of the global installed capacity of cement.

This dominance is fuelled by rich natural resources like limestone and coal, making India a prime location for cement manufacturing.

According to the Cement Manufacturers Association, the country boasts a total installed capacity of more than 540 million tonnes (MT).

This is expected to expand at a compound annual growth rate (CAGR) of 4-5% up to the end of FY27.

The key players include giants like UltraTech Cement, Shree Cement, and ACC, alongside numerous regional players.

The industry contributes significantly to the economy and is well-poised to grow in the coming years.

Between 2016-22, the cement demand in India has grown at a CAGR of 5.65%.

However, this number is likely to inch upwards thanks to the government's renewed focus towards infrastructure in the country.

As the sector expands, it continues to become a vital player in the country's economic landscape, contributing substantially to employment and infrastructure development.

In this piece, we take a deep dive into the workings of the country's cement giants, Ultratech Cement and Ambuja.

Note that Ultratech Cement follows a financial year while Ambuja Cement who followed a calendar year format has switched to the financial year format in 2023.

# Background

Ambuja Cement

Ambuja is one of the oldest Indian cement companies with a rich history.

The company operates at a total installed capacity of 31.5 MT, with an annual production of 26.9 MT, spread across the north, central, west, and east India. Ambuja enjoys a market share of 8%.

Ambuja is also the holding company of ACC, and the two combined, control 67 MT (13%) of India's cement capacities.

Over the last two decades, the company has undergone three promoter changes.

Back in 1996, the Neotia family sold the company to Holcim, subsequently acquired by the Adani Group in 2022.

In a bid to expand its cement holdings in the country, the Adani group acquired Holcim's entire stake in two of India's leading cement companies - Ambuja Cements and ACC.

Ultratech Cement

Ultratech is India's largest cement company operating at a total capacity of 133 MT.

The cement firm, over the past decade, has grown ahead of other largecaps add capacity both organically and inorganically with a market share of around 25%.

The company is a part of the Aditya Birla conglomerate and has operations that span across India.

It also has a presence in countries such as UAE, Bahrain, Bangladesh, and Sri Lanka. This exposure to different markets bodes well for a cement company, diversifying its business.

So, for some reason, if the market in one part of the country doesn't perform well, the profits from the other markets can help mitigate that.

Note: Ultratech has always used a financial year format to report its annual performance. Whereas Ambuja has changed its financial year end from April to March. Previous reporting year was from January to December. The current report is for the period between January 01, 2022 - March 31, 2023. Therefore, the data for the current year is for 15 months and not comparable with the figures for the previous 12 months year ended December 31, 2021.

Capacity and Production

Ambuja vs Ultratech Growth in Production (2019-2023)

	2019	2020	2021	2022	2023
Ambuja (standalone)	26.2	28.3	28.8	25.9	33.9
Ambuja (Consolidated)				52.8	67.1
Ultratech Cement	81.2	80.1	82.7	90.4	103.3
Production growth YOY%
Ambuja	0.00%	8.00%	1.80%	-11.50%	32.90%
UltraTech	33.80%	-1.40%	3.20%	9.30%	14.30%

Data Source: Equitymaster

Demand growth for the cement sector is driven by housing, infrastructure, commercial and industrial segments, backed by continuous policy and investment support from the government.

Policies like Performance Linked Incentive (PLI) are also aiding the growth of the industrial sector in the country.

# Revenue Growth

Ambuja vs Ultratech Revenue Growth (2019-2023)

	2019	2020	2021	2022	2023
Revenue (Rs m)
Ambuja	2,60,409	2,71,036	2,45,162	2,89,655	3,89,370
Ultratech Cement	4,16,088	4,24,299	4,47,258	5,25,988	6,32,400
Revenue growth YoY%
Ambuja		4.08%	-9.55%	18.15%	34.43%
UltraTech		1.97%	5.41%	17.60%	20.23%

Data Source: Equitymaster

Ultratech's 5-year compounded annual growth (CAGR) of 15% in revenue is 1.5 times that of Ambuja Cements at 10.5%.

This comes on the back of massive capacity expansion combined with heavy demand from housing and infrastructure projects across the country.

In the past 5 years, Ultratech has expanded its capacity from 94.5 MT in 2019 to 133 MT at present.

The company has been adding capacity, organically and inorganically, acquiring 3 companies in the last 5 years.

# Profitability

Ambuja vs Ultratech Profit Margins (2019-2023)

	2019	2020	2021	2022	2023
Operating Profit %
Ambuja	15.40%	16.90%	19.70%	19.70%	13.30%
Ultratech Cement	19.80%	17.70%	21.50%	25.80%	21.90%
EBIDTA per ton (Rs.)
UltraTech	964	1,237	1,502	1,336	1,080

Data Source: Equitymaster

	2019	2020	2021	2022	2023
Ambuja Production	26	28	29	26	34
ACC Production	28	28	24	27	33
Ambuja EBIDTA	22,664	25,754	30,186	34,963	41,727
EBITDA per tonne	865	910	1,048	1,371	1,231
Consolidated Production (assuming 100% of Ambuja + 50% of ACC)	43	45	43	42	54
Consolidated EBIDTA	40,108	45,970	50,056	61,995	51,224
Consolidated EBITDA per tonne	928	1,021	1,162	1,488	953

Data Source: Equitymaster

Note, consolidated production and EBIDTA includes 100% of Ambuja + 60% of ACC's.

A cement company's profitability is best reflected in its earnings before interest depreciation tax per tonne (EBIDTA per tonne).

Simply put, it's the profit from core operations (before interest and depreciation) a company makes on every tonne of cement it sells.

Higher profitability is usually a result of two things; either the company operates in highly profitable regions or it has managed to keep a tight lid on its costs.

While Ultratech has been performing well, Ambuja, on a consolidated basis has been catching up.

Moreover, a big drag on Ambuja consolidated performance comes from the again plants of ACC and its large exposure to the not so profitable southern markets.

# Regional mix

While Ultratech and Ambuja both enjoy captive resources for raw materials and power supply, Ambuja operating costs are relatively higher than Ultratech.

A large part of the difference stems from the higher other manufacturing expenses reported by the company.

Ambuja, together with ACC enjoys a widespread presence as well, with north accounting for 42%, south 9.4%, west 21.5%, and east 27.1% of sales.

Ultratech Cement also caters to a well-diversified market, with north accounting for 19.9%, south 15.4%, west 23.1%, central 21.3%, and east 20.3% of sales.

# Expansion plans

Ambuja Cement and ACC are set to embark on an ambitious journey to double their combined capacity from 67.5 MT to 140 MT by 2028, involving a substantial total capital expenditure of Rs 460 bn.

To help accelerate this goal, Ambuja acquired Sanghi Industries in August 2023 at an enterprise value of Rs 50 bn, fully funded through internal accruals.

The joint entity has already disclosed 19 MT of addition, including greenfield and brownfield, by FY 2025 and FY 2026.

Ultratech Cement aims to expand its current capacity of 133 MT to 157.4 MT by FY 2025 and enhance it further to 175 MT by FY 2027.

For the initial phase of expansion to 157 MT, a mix of new projects and brownfield expansion, the company has outlined an total capex of Rs 130 bn.

# Debt to Equity

Ambuja vs Ultratech Debt to Equity (2019-2023)

	2019	2020	2021	2022	2023
Debt to Equity
Ambuja	Nil	Nil	Nil	Nil	Nil
UltraTech	0.89	0.59	0.46	0.2	0.18

Data Source: Equitymaster

This ratio measures the level of debt a company takes on to finance its operations or expansion, against the level of equity that is available.

Generally, a favorable debt-to-equity ratio is less than 1.0, while a risky debt-to-equity ratio is higher than 2.0.

While Ambuja enjoys a debt-free status, Ultratech has borrowed money to fund its massive expansion in the past decade.

But considering it has been less than 1 and follows a falling trend, it is not a cause for concern.

Dividend

Dividend is the income an investor can make from stocks, other than the appreciation in the value of the share.

Owing to the capital intensive nature of the business, cement companies are not dividend paymasters.

This is reflected in the five-year median dividend yield for Ambuja Cement and Ultratech Cement at 0.8% and 0.5%, respectively.

# Return on capital employed (ROCE)

Return on capital employed is one of the most meaningful indicators of a company's profitability and efficiency.

An excellent tool for analyzing returns of a capital-intensive industry like cement, it tells you the kind of money a company can generate on the total capital invested (shareholders equity plus borrowed money).

Ambuja vs Ultratech Return on Capital Employed (2019-2023)

	2019	2020	2021	2022	2023	5-Year Average
Return on capital employed (in %)
Ambuja	14.3	17.4	17.6	22	13.7	17
UltraTech	10	11.8	14.7	14.9	13.2	12.9

Data Source: Equitymaster

The five-year average for Ambuja is much higher than that of UltraTech.

While this usually means that Ambuja is generating more returns by employing its capital efficiently, in this case, it might be different.

UltraTech's expansion over the years is yet to generate adequate profits, affecting its return on capital employed currently.

But over the next few years, as a large part of the new capacity turns profitable and it reduces debt, this number will increase.

# Valuation

The most common and effective ratios for comparative analysis and valuation are the Price to Earnings (PE) and Price to book (PB) value ratio.

While the PE ratio uses the company's earnings to determine the value a shareholder assigns against one rupee of earnings; the PB ratio uses a company's book value to determine the same.

Ambuja vs Ultratech Valuation Ratios (2021-2022)

	P/BV Ratio	10-year average P/BV	P/E Ratio	10 year average PE
Ambuja	3.3	2.6	36.2	27.3
UltraTech	5.1	3.8	45	34.2

Data Source: Equitymaster

The PE and PB ratios for Ambuja is at 36.2x and 3.3x, respectively. For the last 10 years, the average is 27.3x and 2.6x, respectively.

For Ultratech Cement, the PE and PB stood at 45x and 5.1x, respectively. The ten-year average is 34.2x and 3.8x, respectively.

Ambuja and Ultratech, both are trading at a premium to their 10-year average, indicating the stocks might be overvalued at the moment.

# Sustainability Efforts

Climate change is among the most pressing issues facing humanity today.

Governments world-over are grappling with this issue, forcing companies to become more environmentally friendly.

A critical step in this direction for companies is to reduce their carbon emissions.

Carbon emission in top cement companies is measured in terms of kilos per tonne of cementitious material.

Both Ambuja and Ultratech stand at 466 kilos per tonne and 557 kilos per tonne of cementitious material.

Most carbon emissions associated with cement occur during production which is resolved with the use of alternate components such as fly ash and slag.

Drawing energy from renewable sources is another helpful step towards sustainability.

As of FY 2023, UltraTech's 32% of the energy requirement is met through renewable energy capacity, while Ambuja 's 43% of the energy requirement is met through renewable energy capacity.

Ultratech is 4.2 times water positive, which means they return 4.2 times the amount of water they consume, to the community. Ambuja is 8 times at present and aim to be 8 times by 2030.

# Bright Prospects

Cement production in India has been growing in the range of 8-10% and is expected to reach 390MT in FY 2023.

Yet, the per capita consumption of cement is low in the range of 260 - 265 kg compared to the world average of 500 kg, which translates into huge future growth potential for the cement industry.

The catalysts behind the sector's demand surge include housing, infrastructure, commercial, and industrial segments, supported by consistent government policies and investments.

Initiatives such as the Performance Linked Incentive (PLI) further fuel industrial sector growth.

Large Investments in highway/road and infrastructure projects due to increased budget outlay by the government has provided an extra push to demand growth.

India is building roads at a record rate and the country's national highway network has increased consistently due to a systematic push through corridor-based national highway development approach.

Despite a decade of substantial capacity expansion in the cement industry, demand hasn't kept pace. Surprisingly, margins have remained resilient, attributable to the consolidation in the industry.

2023 witnessed major consolidations, with Ambuja Cements acquiring Sanghi Industries, Ultratech Cement securing Kesoram Cement, and Dalmia Cement making a strategic move with JP Cement.

The top five players control a lion's share of the market. Regionally, this number is significantly higher.

Ambuja or Ultratech: Which is better?

Ambuja has reported far superior returns, visible in the higher return on capital employed.

Together with ACC, it has been working diligently towards optimizing its production capacity, benefiting from operational and financial synergies.

Looking ahead, the joint entity has set ambitious target to ramp up their capacity, aiming to capture a larger market share.

Registering robust revenue and production growth along with higher operating margins, Ultratech has been functioning more efficiently than Ambuja's consolidated business.

The largest player in the country aims to grow its business in line with the industry and seems well-poised to benefit from the growth in the sector.

However, the recent run-up in the stock prices of Ambuja and Ultratech indicates investors have already factored in the bright prospects.

Still Wondering Which is Better?

Use our feature-rich comparison tool, which draws a detailed comparison between any two companies.

This tool also includes a graphical analysis making it easy for you to see trends!

You can also compare companies with their peers.

Ambuja vs ACC
Ultratech vs ACC

For a more detailed analysis, check out the Ambuja factsheet and Ultratech factsheet.

You can also check out the latest quarterly result for Ambuja and Ultratech.

As stocks from thecement sector interest you, check out Equitymaster's powerful Indian stock screener tool to find the top cement companies in India.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...