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ACC: Extraordinary boost
Jan 24, 2006

Performance Summary
ACC, one of the largest cement manufacturers in the country, declared its 3QFY06 and full year results just a short while ago. It must be noted that the company has changed its accounting year from April-March to a calendar year. Therefore, the 9mFY05 numbers are in effect the company’s CY05 numbers. During the quarter, the company has reported a 12% YoY growth in topline while the bottomline has registered a YoY growth of 263% YoY. However, it must noted that this includes an extraordinary income of Rs 984 m largely pertaining to profit on divestment of subsidiary (Everest Industries). Taking out the extraordinary effect, the company has logged in a bottomline growth of 76% YoY. The company has announced a dividend of Rs 8 per share (dividend yield of 1.6%)

As far as the company’s December ending nine-months performance is concerned, the bottomline growth has been lower at 20% YoY (excluding extra-ordinaries) on the back of a 15% YoY topline growth. However, it must be noted that the current quarter and 9mFY06 results are not exactly comparable owing to the fact that the company had divested its refractory business during 2QFY06.

(Rs m) 3QFY05 3QFY06 Change 9mFY05 9mFY06 Change
Net Sales 9,553 10,721 12.2% 27,885 32,053 14.9%
Expenditure 8,350 9,147 9.6% 23,308 26,946 15.6%
Operating Profit (EBDITA) 1,204 1,574 30.7% 4,577 5,107 11.6%
EBITDA margin (%) 12.6% 14.7%   16.4% 15.9%  
Other income 323 345 7.0% 549 1,013 84.7%
Interest 273 213 -21.9% 678 632 -6.8%
Depreciation 512 607 18.4% 1,396 1,574 12.8%
Profit before tax 742 1,099 48.3% 3,052 3,915 28.3%
Extraordinary item (5) 984   (5) 2,787  
Tax 206 158 -23.1% 921 1,349 46.4%
Profit after Tax/(Loss) 531 1,925 262.6% 2,126 5,353 151.8%
Net profit margin (%) 5.6% 18.0%   7.6% 16.7%  
No. of Shares (m) 179 184   179 184  
Diluteded earnings per share*         38.3  
Price to earnings ratio (x)         14.3  
(* trailing 12-month earnings)            

What is the company’s business?
Associated Cement Companies (ACC) is the oldest and the second largest cement manufacturer in the country. The company has a total consolidated capacity in the region of 17.6 MT (million tonnes) and commands a near 12% industry capacity share. With 14 plants and a 9,000 strong dealer network, ACC is one of the few companies to have a pan-India presence. It is particularly strong in the northern and eastern regions with approximately 18% and 19% of the market share respectively.

What has driven performance in 3QFY06?
Respectable topline: Led by the 11% growth in cement despatches during the quarter and better cement realisations, ACC reported a 12% YoY growth in topline. However, it is important here to consider the segmental break-up of the topline, as the current quarter’s numbers do not include revenues from of the refractory business (7% of revenues in 3QFY05), which the company had divested earlier during the current fiscal. Thus, while revenues from the cement business (85% of revenues in 3QFY05) have been higher by 19% YoY during the quarter, the ready-mix concrete business (5% of 3QFY05 revenues) logged in a growth of 22% YoY. Thus, in 3QFY06, these two businesses contributed to 95% of ACC’s revenues. Robust demand from the housing and infrastructure sectors is helping the demand for cement to stay firm in the country.

Cost break-up (% of net sales)
(Rs m) 3QFY05 3QFY06 9mFY05 9mFY06
Inc/Dec in stock in trade 1.2% -0.8% -3.0% -1.5%
Raw material consumed 17.5% 16.7% 18.5% 17.6%
Staff costs 6.4% 6.2% 6.8% 6.7%
Power & Fuel 22.8% 25.8% 25.2% 23.8%
Freight & Forwarding 14.5% 20.7% 15.7% 19.3%
Excise (net of recovered) 0.2% -1.3% 0.5% 0.8%
Purchase of cement 10.7% 1.0% 9.1% 6.1%
Other expenditure 26.7% 31.7% 27.1% 27.2%
Total expenses 100.0% 100.0% 100.0% 100.0%

Margins improve, but…: The company continued to face pressure on most of the operating heads, as is evident form the table above. While raw materials and staff costs were lower as a percentage of net sales, power & fuel costs and freight and forwarding charges registered a sharp increase on the back of rising input costs like coal and petro products. However, a significant fall in purchase of cement from almost 11% of net sales in 3QFY05 to 1% of net sales in 3QFY06 helped save the day for the company.

Extra-ordinaries boost bottomline: While the advantage of the 7% rise in other income and a 22% fall in interest expense was nullified by the 18% YoY rise in depreciation charges, the company reported a 263% YoY growth in bottomline for the quarter. However, as mentioned earlier, this boost was provided by the effect of an extraordinary income pertaining to the profit on sale of shares (in Everest Industries) by the company. Without considering the extra-ordinaries, the bottomline growth stands at a more modest 76% YoY.

Performance over the last few quarters…
  3QFY05 4QFY05 1QFY06 2QFY06 3QFY06
Net sales growth (YoY, %) 25.7% 15.6% 19.0% 13.5% 12.2%
Net profit growth (YoY, %)* 140.1% 59.6% 72.1% -70.6% 75.7%
Operating margins (%) 12.6% 14.8% 18.9% 13.9% 14.7%
* excluding extraordinary items

What to expect?
At Rs 550, the stock is trading a price to earnings multiple of 14.3 times its trailing 12-month earnings. Further, on the EV/ton basis as on CY07E, it is trading at about US$ 110. Notwithstanding the one-off effects, the company’s performance was a tad below our CY05 estimates. Thus, going forward, we do not feel the need to incorporate any major changes to our estimates going forward. However, considering the current valuations of the stock, we continue to believe that the stock does not leave any margin of safety for an investor.

Having said that, going forward, we remain optimistic on the cement sector as a whole, which is in the midst of surging demand led by the booming housing industry and is also being aided by the growth in infrastructure related activities. Coupled with the lack of any significant greenfield cement capacity addition in the medium-term, we expect the pricing environment to remain favourable for cement manufacturers.

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