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ACC: Riding the boom - Views on News from Equitymaster
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ACC: Riding the boom
Apr 12, 2006

Performance summary
ACC announced its 1QCY06 results just a short while ago. The company has reported enthusing results for the quarter wherein it has reported a 19% YoY growth in topline. Helped by strong improvement in operating margins, the bottomline has increased by 42% YoY. Strong volume sales during the quarter and significant improvement in realisations have helped the company deliver this performance.

(Rs m) 4QFY05 1QCY06 Change
Net Sales 11,134 13,275 19.2%
Expenditure 9,482 10,125 6.8%
Operating Profit (EBDITA) 1,651 3,151 90.8%
EBITDA margin (%) 14.8% 23.7%  
Other income 417 537 28.9%
Interest 204 194 -4.9%
Depreciation 473 594 25.5%
Profit before tax 1,391 2,900 108.5%
Extraordinary item - -  
Tax (264) 545 -306.7%
Profit after Tax/(Loss) 1,655 2,355 42.3%
Net profit margin (%) 14.9% 17.7%  
No. of Shares (m) 179 187  
Diluted earnings per share*   42.0  
Price to earnings ratio (x)   21.7  
(* trailing 12-month earnings)      

Note: The company has changed its year-ending from March to December. Consequently, 4QFY05 is the corresponding quarter last year for 1QCY06. It must also be noted that the results of the quarter under consideration are not strictly comparable to that of last year, as the company has divested its refractory business as of September 2005. Also 1QCY06 results include figures of Bargarh Cement Ltd. and Damodar Cement & Slag Ltd., which have been merged with the company with effect from April 1, 2005.

What is the company’s business?
Associated Cement Companies (ACC) is the oldest cement manufacturer in the country. Consequent to Holcim’s acquisition of a 14.8% stake in Gujarat Ambuja (an open offer for an additional 20% stake is due soon), the Holcim-Gujarat Ambuja-ACC combine is now the largest (consolidated) cement manufacturer in the country with about 21% market share, followed closely by Grasim-Ultratech combine. ACC has a total consolidated capacity of 18.1 MT (million tonnes) and has 11% market share. With 14 plants and a 9,000 strong dealer network, ACC is one of the few companies to have a pan-India presence. It has a strong presence in the northern, southern and eastern regions with approximately 21% to 22% of the market share in each region.

What has driven performance in 1QCY06?
Robust topline growth: The quarter witnessed strong volume sales growth by ACC, up 11% YoY. This coupled with improved realisations of about 8% YoY resulted in the company clocking a 19% YoY growth in topline in 1QCY06. While strong volume sales could be attributed to the fact that the demand for cement has continued to remain robust across regions in the country, cement prices have been moving northwards owing to cement supply failing to match up to the demand requirements.

Performance over the last few quarters…
  3QFY05 4QFY05 1QFY06 2QFY06 3QFY06 1QCY06
Net sales growth (YoY, %) 25.7% 15.6% 19.0% 13.5% 12.2% 19.2%
Net profit growth (YoY, %)* 140.1% 10.8% 72.1% -70.6% 75.7% 100.6%
Operating margins (%) 12.6% 14.8% 18.9% 13.9% 14.7% 23.7%
*excluding extraordinary items

Operating margins leapfrog: The quarter has witnessed a considerable improvement in operating margins, which have shot up to 23.7% in the quarter under consideration from 14.8% in the corresponding quarter of last year. While part of this improvement can be attributed to better realisations, considering that ACC’s earnings are amongst the most sensitive to price fluctuations, control over raw material (16% of total operating expenses), power & fuel costs (23% of total operating expenses) and other manufacturing expenses (25% of total operating expenses) have aided margin expansion. However, considerable pressure was witnessed on the freight costs front with these increasing by 260 basis points YoY as percentage of net sales during the quarter. This could be attributed to the rise in transportation charges in view of the ban on overloading of trucks.

Bottomline doubles: While the reported numbers show a bottomline growth of 42% YoY, if one excludes the benefit derived by the company in the quarter ending March 2005 pertaining to the tax write-back of Rs 482 m, the bottomline growth for 1QCY06 stands at 101% YoY. Falling interest expenses and a 29% increase in other income have also contributed to this growth in a small way.

What to expect?
ACC’s 1QCY06 results have been above our expectations and we will be upgrading our numbers soon. While the topline has been in line with our estimates, the surprise came in at the operating level performance. Currently, our back of the envelope calculations reveals that at Rs 911, the stock trades at 14.9 times our (upgraded) estimated CY08 earnings. Further, on the EV/ton basis as on CY08E, it is trading at about US$ 161. However, despite the upgrade, considering the current valuations of the stock, we continue to believe that the stock does not leave much margin of safety for an investor and maintain our SELL recommendation on the stock.

Having said that, going forward, we remain optimistic on the cement sector as a whole, which is in the midst of surging demand led by the booming housing industry and is also being aided by the growth in infrastructure related activities. Coupled with the lack of any significant greenfield cement capacity addition in the medium-term, we expect the pricing environment to remain favourable for cement manufacturers.

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