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ACC: Core business gains! - Views on News from Equitymaster
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ACC: Core business gains!
Feb 2, 2007

Performance summary
ACC, the second largest cement manufacturer in the country, has announced robust 4QCY06 and full year CY06 results. The company has reported a stellar topline growth of 50%YoY and a whopping bottomline growth of 107%YoY during 4QCY06. Even after excluding other income and extraordinary income, the net margin have expanded by 1270 basis points (12%). Also for the full year, the company has reported strong numbers on the back of improved physical performance and favorable pricing scenario. Though the input costs scaled up, operating margins stood at 29% for 4QCY06 and 28% for the full year, mainly driven by volume growth and better sales realisation.

Current quarter and year figures are not fully comparable with the corresponding periods as Tarmac (India) Pvt Ltd has been merged with the company with effect from January 1, 2006.

Financial performance snapshot
(Rs m) 4QCY05 4QCY06 Change 12mCY05 12mCY06 Change
Net sales 10,784 16,199 50.2% 43,341 58,035 33.9%
Expenditure 9,110 11,514 26.4% 36,256 41,803 15.3%
Operating profit (EBITDA) 1,674 4,685 179.9% 7,085 16,232 129.1%
EBITDA margin 15.5% 28.9%   16.3% 28.0%  
Other income 221 580 162.1% 1,116 1,315 17.8%
Interest 213 41 -80.7% 841 520 -38.2%
Depreciation 594 771 29.8% 2,122 2,543 19.8%
Profit before tax/(loss) 1,088 4,454 309.3% 5,238 14,484 176.5%
Extraordinary items 984 153 -84.5% 2,995 1,711 -42.9%
Tax 337 1,021 202.8% 1,136 3,877 241.4%
Net profit 1,735 3,585 106.7% 7,097 12,318 73.6%
Net profit margin 16.1% 22.1%   16.4% 21.2%  
No of shares (m)       185 187  
Diluted EPS (Rs)*         65.5  
P/E (times)         16.1  
*trailing twelve month earnings

What is the company’s business?
Associated Cement Companies (ACC) is the second largest cement manufacturer in the country with a total capacity of 20 MT (11.8% of domestic capacity). With 14 plants and a 9,000 strong dealer network, ACC is one of the few companies to have a pan-Indian production presence. From a diversified player with interest in manufacturer of automotive tyres and float glass, the company has evolved into a core cement manufacturer over the last decade. Holcim, the European cement major along with Gujarat Ambuja, holds 34% stake in the company.

What has driven performance in 4QCY06 and during full year?
Its all in the prices: The production and sales of the company in CY06 reported a strong growth of 7%YoY and 6.6%YoY respectively. The performance on a consolidated basis was slightly better as sales volumes went up by 7.8%YoY. However, this was still not enough to beat the industry growth rate of 11% YoY during the same period. A major chunk of the 34% YoY growth in standalone topline was contributed by realisations that continued to inch higher on account of favorable demand supply scenario. The standalone topline growth of 50%YoY during the quarter was also achieved mainly on account of improved sales realisations. Moreover, the turnaround strategy also revolved around improving its core business i.e. cement. It has to be remembered that the company divested its refractory division in the first quarter of the calendar year. Just considering the core operations of the company-cement and RMC- topline grew by almost 54%YoY during the quarter, which is commendable. Going forward, considering robust demand for cement and slower pace of capacity additions, company will continue to benefit in the near term from a favourable pricing scenario.

Increase/Decrease in stock 4QCY05 4QCY06
Consumption of raw materials 13.6% 10.8%
Staff cost 4.7% 6.5%
Power and fuel 21.9% 14.0%
Outward freight 17.5% 14.0%
Other expenditure 26.9% 20.8%
Excise duty -1.1% 1.7%
Purchase of cement and other products 0.9% 0.9%
Total expenses 84.5% 71.1%

Rising costs a concern: Though costs as a percentage of sales have come down by 1,340 basis points (13.4%), costs on a per tonne basis have increased by 22%YoY, which is a cause for concern. The costs pressure increased on account of increased freight rates and higher coal and petroleum products prices. The staff costs have also been a cause of downward pressure on margins as on a per tonne basis, they have increased by 98%YoY. Thus, the operating margin expansion was achieved mainly on account of strong realistions.

Core business on firm footing: The company divested its refractory division during the year. Also, a provision of Rs.5 m made in the earlier years on account of a fall in value of investment has been written back during quarter and year ended December 31,2006 on realisation of the book value of investment. Apart from this, the company has also benefited on account of sale of land and undertakings and divestment of erstwhile subsidiary Everest Industries. On account of all these factors, the core business performance has improved drastically, borne out by the fact that if one were to exclude the other income and extraordinary income, the actual growth in net profit is higher at 439% YoY for 4QCY07 and 211% YoY for the full year.

What to expect?
At the current price of Rs 1053, the stock is trading at a price to earnings multiple of 16.1 times trailing twelve month earnings. On account of booming infrastructure and housing sector, demand is expected to continue to grow at 8% to 10% annually. With these expectations, cement manufacturers have lined capacity addition plans and ACC forms a part of this. It has outlined capex to the tune of Rs 11bn to expand capacity, set up ready mix units and captive power plants. In the medium term, cement realisations will continue to be on higher side, as the majority of the capacity additions announced by the players will start flowing in next calendar year onwards. While we admire the company for its improved fundamentals and strong expansion plans, we are perturbed by the current valuation levels, which are ruling at record high levels.

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