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ACC: It's a new beginning

Jan 28, 2005

Performance summary
ACC, the country's second largest cement manufacturer, announced its 3QFY05 results last week. While the topline witnessed a strong growth of over 25% YoY during 3QFY05, the bottomline improved by an impressive 138% YoY. This could be largely attributed to the company's continued focus on cost reduction, bringing about operational efficiencies. To put things in perspective, operating margins improved significantly by 270 basis points during the said period.

What is the company's business?
ACC is the country's oldest cement manufacturer, having a capacity of 17.6 MT (million tonnes) per annum, thereby accounting for nearly 12% of the total domestic capacity. With 11 plants and a strong dealer network of over 9,000, the company has a strong presence across the country. However, the major markets that the company caters to are the northern and eastern segments. The company recently acquired a 75 MW power generation capacity at Wadi from Tata Power for a consideration of nearly Rs 2.4 bn.

(Rs m)3QFY043QFY05Change9mFY049mFY05Change
Net sales7,620 9,553 25.4%23,215 27,885 20.1%
Expenditure6,864 8,350 21.7%20,732 23,312 12.4%
Operating profit (EBDITA)756 1,204 59.2% 2,484 4,573 84.1%
EBDITA margin (%)9.9%12.6% 10.7%16.4%
Other income292 323 10.6%730 555 -23.9%
Interest 229 273 19.3%721 678 -5.9%
Depreciation442 512 15.9% 1,320 1,396 5.8%
Profit before tax378 741 96.3% 1,173 3,055 160.3%
Extraordinary items- 5 125 5
Tax155 206 33.1%105 921 777.3%
Profit after tax/(loss)223 531 137.8%943 2,129 125.6%
Net profit margin (%)2.9%5.6% 4.1%7.6%
No. of shares (m)172.1 179.6 172.1 179.6
Diluted earnings per share (Rs)*5.0 11.8 7.3 15.8
Price to earnings ratio (x) 22.2
(* annualised)

What has driven performance in 3QFY05?
Robust pricing helps revenues: The topline growth of over 25% during the quarter could be attributed to strong volume sales coupled with higher product prices. Robust demand from the housing and infrastructure sectors helped the company boost volumes while at the same time increasing realizations on the back of narrowing demand-supply gap. To put things in perspective, ACC witnessed a strong volume growth of nearly 14% during the 3QFY05. Going forward, realisations are likely to improve on the back of sustained demand momentum and absence of any significant capacity addition in the domestic markets.

Expenditure Table
(%) of sales3QFY043QFY059mFY04 9mFY05
Consumption of raw materials13.3%16.3%15.0%12.9%
Staff cost6.6%5.6%6.4%5.7%
Power & fuel24.6%20.0%24.0%21.4%
Freight & forwarding14.8%12.7%14.2%13.2%
Purchases5.4%9.3%5.6%7.6%
Other expenditure25.4%23.5%24.1%22.8%

Tightens the belt: For the 3QFY05, operating margins have improved by 270 basis points on the back of better control over costs. Although raw material costs increased on the back of inventory losses, the company was efficient in controlling other significant costs such as power (accounting for nearly 22% of total expenditure) and freights.

Operating efficiencies filter down to the bottomline: The bottomline growth of nearly 138% during the quarter is largely due to the company's focus on operational efficiencies. On the one hand, higher sales volumes and better realizations helped the bottomline, cost reduction further provided the fillip. But for a rise in interest and depreciation cost on account of the company's acquisition of the power generation capacity, the bottomline growth would have been stronger.

What to expect?
The stock currently trades at Rs 351 implying a price to earnings multiple of 22.2 times annualised 1HFY05 earnings. The company has traded at a premium valuation as compared to its peers in the past on the back scope for margin improvement at the operating level where the company has lagged peers. Various cost reduction initiatives and firm price is partly reflected in operating margins in 3QFY05, which we expect to improve in the next two years.

As far as the impact of the Holcim deal on the company is concerned, one major factor is that there is now stability at the management level, which is a comforting factor. Uncertainty as to whether Gujarat Ambuja will increase its stake in ACC was an issue before. But given the Holcim acquisition and its international expertise, ACC is likely to benefit from the deal.

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