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Associated Cement Companies - Views on News from Equitymaster
 
 
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  • Apr 14, 2001

    Associated Cement Companies

    Financial year 2001 has been one of the most challenging years for the cement sector. Most companies have witnessed erosion in profitability. Had it not been for the collective effort to curtail supply in the market, cement companies would indeed have suffered significant declines in profitability. Although this trend was sector wide, one company was able to pull through rather well. The company being referred to is Associated Cement Companies (ACC).

    During the last one-year or so, ACC has been undergoing a quiet transformation. First, the company unleashed a cost cutting exercise, which has already begun to reflect in operating margins. Second, the management stated its policy to exit unrelated businesses. Under this initiative, the company recently sold its stake in Floatglass India. Third, the company got a new promoter – Gujarat Ambuja Cements, which is considered to be one of the most efficient cement companies in Asia. These three developments are likely to transform ACC from a diversified cement producer to an efficient and focused cement company.

    ACC: Turning around
        FY00 FY01E
    Stock Price Rs 132.8 132.8
    Net Sales Rs m 23,816.0 26,198.0
    Operating Profit Rs m 1,688.0 3,065.0
    Operating Profit Margin % 7.1% 11.7%
    Net Profit Rs m (589.0) 59.0
    No. of shares m 170.9 170.9
    EPS Rs (3.4) 0.3
    Cement Capacity MMT 13.0 13.0
           
    Market Cap Rs m 22,695.5 22,695.5
    Market Cap per tonne Rs 17,458.1 17,458.1
    P/e x (38.5) 384.7
    Price/sales x 1.0 0.9
           
    Number of Employees* 000 10,275 10,275
    Net Sales per employee Rs 000 2,317.9 2,549.7
    Net profit per employee Rs 000 (57.3) 5.7
    All data for FY01E; Net profit excludes Extraordinary Items
    Expected capacity as in March'01
    * Number of employees as on 31st March 2000
    Consider how the operating margins of the company have moved over the last three quarters - 7.5 percent, 8.6 percent and 11.1 percent, a consistent improvement. It is expected that the full year margins for financial year 2001 will be 11.7 percent. Indeed, cost cutting efforts are beginning to show results. The main contributor to the cost savings has been the switch from grid power (Rs 4 per unit) to captive power (Rs 2.2 per unit). By mid 2003, most of the major plants would be on captive power. The result of these cost cutting measures is anticipated to push operating margins to over 15 percent by financial year 2003.

    ACC, meanwhile, has also been ramping up capacity to maintain its leadership position in the domestic markets. The capacity has increased from 12 million tonnes in financial year 2000 to 15.5 million tonnes presently. The company recently commissioned a 2.6 million tonne cement plant at Wadi (Karnataka). The plant, which employs only 150 people, has a kiln that has a capacity of 10,000 tonnes per day, implying that ACC could expand this plant at a future date at minimal cost. Apart from being highly efficient, the plant will also cater to the southern markets, which yield better realisations. The company has presently not planned any further capacity expansions/additions.

    However, the most significant development has been the acquisition of a 14.4 percent stake in ACC by Gujarat Ambuja (GACM). Together the two companies control nearly 23 million tonnes of capacity, giving the two a market share of over 20 percent of effective capacity. This large market share is anticipated to increase the pricing power of the two companies. And given the large capacity which ACC commands, any rise in realisations is anticipated to have a significant impact on the bottomline.

    Together, these developments are likely to reflect on ACC’s financial performance in the coming years. However, despite these significant developments, it is nowhere near being a star performer on the stock markets. Indeed, the company’s stock price has retraced all the gains registered late last year. This is largely because there are some genuine concerns regarding the company as well as the sector in general.

    The biggest concern facing the company is the possibility that the current rise in cement prices, which has been triggered by a supply cut by leading producers, may not sustain. Indeed, during financial year 2001 ACC posted only a marginal (1 – 2 percent) growth in volumes. The industry infact recorded a decline in volume sales. If realisations were to fall companies could once again be sucked into a downward vortex where lower realisations trigger more supply, which again create pressure on prices. This could jeopardize the companies financial recovery.

    Then there are concerns regarding the company’s ‘reactive’ management. Although GACM has become a strategic investor, its role in the management is limited due to certain legal issues. This could delay what is being called the ‘GACM’ effect. ACC’s management has shown that it is willing to shrug off its old ways to turn ACC into a focused and efficient cement producer. Whether this willingness will continue to reflect in their performance is the key question. If it does, ACC will probably regain its lost glory in a few years from now.

     

     

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    More Views on News

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