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ACC: Realisation benefits linger… - Views on News from Equitymaster
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ACC: Realisation benefits linger…
Jan 31, 2008

Performance summary
  • Better realisations continue to drive the topline of the company, which reported nearly 21% YoY growth, on a standalone as well as consolidated basis for CY07.

  • EBITDA margins remained stable as operating costs grew almost in line with the topline.

  • On a standalone basis, net profits register a growth of 17% YoY. Excluding the impact of the extraordinary expense and other income, net profits rise almost in line with operating profit growth (18% YoY).

  • The company took the decision to transfer the Ready Mixed Concrete Business to its wholly owned subsidiary ACC Concrete Ltd, with effect from January 01, 2008.

  • During the year, the company acquired 14.7% stake in Shiva Cement Ltd (SCL) by way of investment in 21.5 m shares at Rs 11 per share. It has also acquired 17.7 m warrants at Rs 2 each, which are exercisable up to December 17, 2008 at Rs 11 per share.

  • The company has declared final dividend of Rs. 10 per share, along with interim dividend of Rs. 10 per share.

Financial performance snapshot
Particulars Standalone Consolidated
(Rs m) CY06 CY07 Change CY06 CY07 Change
Net sales 58,035 70,072 20.7% 58,512 70,674 20.8%
Expenditure 41,803 50,898 21.8% 41,959 51,363 22.4%
Operating profit (EBITDA) 16,232 19,174 18.1% 16,554 19,312 16.7%
EBITDA margin 28.0% 27.4%   28.3% 27.3%  
Other income 1,417 1,288 -9.1% 1,324 1,218 -8.0%
Interest 520 239 -54.0% 544 244 -55.2%
Depreciation 2,543 3,051 20.0% 2,610 3,130 20.0%
Profit before tax/(loss) 14,586 17,172 17.7% 14,725 17,156 16.5%
Extraordinary items 1,609 2,131 32.4% 1,609 2,099 30.4%
Tax 3,877 4,917 26.8% 3,939 4,981 26.5%
Profit after tax 12,318 14,386 16.8% 12,395 14,274 15.2%
Minority Interest - -   8 2 -77.1%
Share of earnings of associates - -   9 2 -80.0%
Net profit 12,318 14,386 16.8% 12,396 14,273 15.1%
Net profit margin 21.2% 20.5%   21.2% 20.2%  
No of shares (m) 187 188        
Diluted EPS (Rs)*   76.6        
P/E (times)   9.8        
*trailing twelve month earnings

What has driven performance in CY07?
  • ACC continues to report a strong topline growth of 21% YoY, on a standalone as well as consolidated basis for CY07. This growth came on the back of increase in volume sales and improved realisations, which grew approximately in the region of 12% to 15%. The company has announced volume numbers for eleven moths on the basis of the same we have proportionately calculated full year numbers. The volume growth of 7% YoY on a standalone basis is tad lower compared to the industry growth, which is growing at the rate of over 10%. This could be attributed to the fact that the company is operating at optimum utilisation level, which leaves hardly any scope for volume expansion. Thus to cash upon the benign mismatch within industry and maintain its market share the company has outlined huge capex to the tune of Rs 40 bn to expand capacity by almost 7.5 MT, set up ready mix units and captive power plants.

  • Ready mix concrete business that contributes 5% to the net sales has registered a growth of 22% YoY. The RMX consumption in India (more than 20% of the cement consumption) is low compared to developed countries. However, the potential and scope for future growth in this business is enormous. The growth is being fuelled by the increased thrust on infrastructural activities within the country. Considering the future prospects of this business segment and ease in operations, the company must have taken the decision to transfer the Ready Mixed Concrete Business to its wholly owned subsidiary ACC Concrete Ltd, with effect from January 01, 2008.

    Cost break- up
    Particulars Standalone Consolidated
    ( % of sales) CY06 CY07 CY06 CY07
    Consumption of raw materials 12.2% 11.6% 12.3% 12.0%
    Staff cost 5.5% 5.0% 5.5% 5.0%
    Power and fuel 16.8% 17.0% 16.7% 17.0%
    Outward freight 14.1% 13.5% 13.9% 13.3%
    Other expenditure 21.0% 22.3% 20.9% 22.2%
    Excise duty 1.5% 1.8% 1.5% 1.8%
    Purchase of cement and other products 0.9% 1.3% 0.9% 1.3%

  • The operating profits registered 18% YoY growth on a standalone basis, while 17% YoY on consolidated basis. Though costs as a percentage of sales basis have reduced, on cost per tonne basis they have increased by almost 13% YoY. The company managed to contain growth on raw material and employee costs, however, on account of rising prices of input costs (coal and petroleum products) led to 14% YoY growth in power and fuel costs on a cost per tonne basis. This did have a negative impact on total costs during the quarter. As costs grew at a tad faster pace compared to topline growth, EBITDA margins have contracted by 0.6% (standalone basis) and 1% (consolidated basis).

  • For CY07, on a standalone basis the company reported almost 17% YoY growth in net profits and consolidated net profits grew by 15% YoY. However, if one excludes the impact of the extraordinary expense and other income, net profits on a standalone grew almost in line with operating profit growth clocking 18% YoY

  • On a standalone basis, net margins have contracted by 0.7% almost in line with operating margins. The change in depreciation, method based on review and reassessment of the intrinsic configuration and capabilities, from continuous basis to straight-line method for the grinding unit at Tikaria, Sindri and Damodar has resulted in higher depreciation charges to the tune of Rs 383 m impacting net margins. Still the net margins have contracted by 0.7% almost in line with operating margins, owing to reduced interest outgo. With the improvement in cash flows owing to favourable scenario, the company has reduced its debt burden.

What to expect?
We are positive on the sector growth owing to infrastructural activity taking place to support and sustain the current economic growth. However, what is concerning us is the fact that current high realisations will not sustain once the capacities start flowing in starting 2008. Thus, while the near term scenario is favourable, from a medium to long-term standpoint risks outweigh rewards and hence we suggest investors to exercise caution.

At the current price of Rs 750, the stock is trading at fair valuation of over US$ 100 on the enterprise value per tonne (EV/tonne) basis as per our CY09 estimates.

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