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ACC: Unlocking value

Apr 12, 2002

ACC has turned out to be one of the better performers in FY02, where its cement dispatches grew at an average of 15%. The company has successfully leveraged its strategic alliance with Gujarat Ambuja (GACL) in order to achieve higher operational efficiency and better realisations. This at a time most other cement producers have been troubled by poor realisations. ACC with its broad reach and huge capacity has been in a better position to keep a check on the fluctuating realisations.

After a dismal FY00 when ACC posted a net loss of Rs 589 m, the company turned around to record a profit of Rs 475 m in FY01. In FY02 too, the company has posted encouraging results for the first three quarters. The company has registered nearly 8% topline growth in the first nine months of FY02 compared to the same period in FY01. Efficient operation of the cement plants and labour rightsizing measures have ensured improved operating margins. From a low of 6.2% in FY00, the operating margins during 9mFY02 stand at 15.1%. The net profits have also improved and stand at Rs 778 m during this period.

FY02 (in Rs m) Q1 Q2 Q3 Q4E
Sales 8,320 7,139 8,140 9,361
Operating Profit Margins 18% 18% 14% 14%
Net Profits 439 170 169 187

What is even more encouraging is that the strategic alliance with GACL has helped ACC become much more proactive in terms of increasing operational efficiencies. Increased focus towards high demand markets in the northern and the eastern regions of the country has ensured higher realisations. Many measures have been initiated in order to bring the operating margins to global standards. Captive plants are being set up in order to reduce reliance on state electricity boards and to reduce the costs incurred on power. Rationalisation of raw material usage has also been initiated in order to reduce costs on this front.

Apart from the above, ACC is also focusing on improving efficiencies in its cement production. The company’s new 2.6 m tonnes Wadi cement plant is highly efficient, manned by only 150 personnel. ACC is looking to expand capacity of this plant to 5 m tonnes in the next three years.

The reduction in the average age of its plants from 30 to 18 years is another sign of improving efficiency. ACC is planning to exit from its remaining non-core businesses (consultancy, refractory), a move which will strengthen its core competence and efficiencies.

However, it needs to be pointed out that ACC’s strategy is not without pitfalls. ACC is planning to expand its capacities in the next three years. Competition is also expanding capacities. But all this capacity expansions are in a market where supply is greater than demand currently. In this scenario, ACC might find it tough to maintain its higher realisations going forward. One must remember that ACC is most sensitive to changes in cement prices. A Re 1 increase in the price of cement leads to an increase of Rs 180 m in revenues and vice versa.

ACC’s potential for improvement is considerable as its current operating margins are nowhere near the best in the industry. GACL and Madras Cement have operating margins in the range of 28-32%. All in all, ACC has still a lot of potential to strengthen its position in the cement industry. And as it achieves each milestone, valuations are likely to move in tandem.

The stock is currently trading at Rs 150 implying a price to earnings multiple of 25x based on annualised 9mFY02 earnings.

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