While the cement industry continues to be in the throes of weak demand offtake, ACC, the second largest cement maker in the country, has had a comparatively better year so far. The company's despatches for the first two months of the fourth quarter have grown by close to 17% on a YoY basis. Cumulatively also, the despatches have been decent, growing by 11% YoY for the period April-Feb'04. Besides, the company has also raised US$ 100 m recently - US$ 60 m were raised by selling foreign currency convertible bonds and US$ 40 m through global depository shares. Let us analyse where the company is headed and also the purpose behind the current fund raising program of the company.
As far as the fund raising is concerned, the company has made quite a few investments in recent times, which would require substantial infusion of funds. Prominent among these would be the company's acquisition of IDCOL's (Industrial Development Corporation of Orissa Ltd.) ailing cement plant - IDCOL Cement Ltd (ICL) for a total consideration of Rs 1.8 bn. The acquired company has a total cement capacity of 1 m tonnes and is located in the state of Orissa. In addition to shelling out funds for the acquisition, ACC is also planning to increase its clinker capacity by around 35% and cement capacity by around 1 m tonne.
Moreover, it has also infused some fresh capital into its ailing subsidiaries, ACC Machinery Company (AMCL) and ACC Nihon Casting (ANCL). Fresh investment in subsidiaries was crucial for the company as not only it would prevent them from coming under the BIFR net, but would also attract potential buyers as ACC is planning to divest its non-core businesses.
On account of these moves by the company, its capital requirements have shot up significantly. Moreover, due to the old age of its plants and relatively lower operating margins, the company saves little by way of cash and other liquid investments. Thus, in order to fund the current spate of investments, it was imperative for the company to tap the capital markets.
Given the company's experience and track record of turning around a sick company (it had successfully turned around Damodar Cement and Slag Limited) and the fact that that the state of Orissa has a cement deficit of 1 m tonnes, it might be able to efficiently utilise the funds and also reward its shareholders adequately.
As far as the future prospects are concerned, the company has realised that in order to hold its own against the newer and more productive plants of its competitors, it will have to make significant improvement in its operations as well. The efforts seem to be bearing fruit in some regards. As is shown in the chart below, in the last five years, the number of employees have declined thereby improving productivity. Besides, ACC has also exited from some of its non-core businesses (ACC Bridgestone and International Ferrites) and more are in the pipeline. The captive power consumption capacity has also improved to 83%, and this will enable the company to bring down its energy costs in the future. Thus on account of these measures, we expect the profitability of the company to improve in the near future.
Moreover, on account of the huge unmet demand for dwelling units and government initiatives in the infrastructure sector, the industry is expected to grow in the region of 8%-9%. ACC, with its strong distribution network and a pan India presence is likely to be one of the foremost beneficiaries of this rise in demand. Also, there has been no greenfield expansion this year and with increased consolidation (top 6 players now account for 60% of the industry capacity), the realisations are also likely to improve.
The stock is currently trading at Rs 255, implying a P/E of 35x its annualised 9mFY04 earnings. Despite its low operating margins and higher financial leverage, the company is trading at a premium to its more cost effective counterparts like Gujarat Ambuja. The valuations are therefore looking stretched from a medium term perspective despite the fact that the industry growth prospects look good. The strength in the stock could also be a factor of investor expectation that either Gujarat Ambuja would hike its stake in the company, in the wake of consolidation across the industry, or another strategic partner (e.g. an MNC) may look at acquiring stake in the company.
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