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ACC: Pricing edge
Apr 19, 2007

Performance summary
ACC, the second largest cement manufacturer in the country, reported enthusing results for the first quarter of CY07. The company has reported a topline growth of 26%YoY and a robust bottomline growth of 55% YoY during 1QCY07. Though the input costs scaled up, operating margins stood at 30% for 1QCY07, mainly driven by better sales realisation. Excluding the extraordinary item, the bottomline for the quarter has grown by 46% YoY. The company has reported strong numbers on the back of favourable pricing scenario and fall in interest costs.

Financial performance snapshot
(Rs m) 1QCY06 1QCY07 Change
Net sales 13,275 16,748 26.2%
Expenditure 10,125 11,677 15.3%
Operating profit (EBITDA) 3,151 5,071 61.0%
EBITDA margin 23.7% 30.3%  
Other income 537 284 -47.1%
Interest 194 40 -79.4%
Depreciation 594 621 4.6%
Profit before tax/(loss) 2,900 4,694 61.9%
Extraordinary items - 200  
Tax 545 1,256 130.3%
Net profit 2,355 3,638 54.5%
Net profit margin 17.7% 21.7%  
No of shares (m)   187  
Diluted EPS (Rs)*   72.4  
P/E (times)   10.8  

What is the company’s business?
Associated Cement Companies (ACC) is the oldest cement manufacturer in the country. ACC (consolidated) has a total capacity of 20 million tonnes (12% of total Indian capacity) and is the second largest player in the Indian market after the Grasim-Ultratech combine (31 MT). With 14 units and a 9,000 strong dealer network, ACC is one of the few cement companies to have a pan India 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 almost 35% stake in the company.

What has driven performance in 1QCY07?
Realisation led growth: Despite witnessing a 1% YoY decline in sales volume during the quarter as compared to previous quarter, net sales witnessed a growth of 26% YoY on account of improved sales realisation. The net sales realisations grew by almost 28% YoY during 1QCY07. The production and dispatches were affected to some extent due to planned stoppages in the month of February on account of certain technical modifications carried out at three of the company’s plants. Robust demand from the housing and infrastructure sectors is helping the demand for cement to stay firm in the country. Moreover, the turnaround strategy also revolved around improving its core business i.e. cement.

Ready mix concrete business that contributes almost 5% to the net sales has registered a growth of 12% YoY. The RMX consumption in India (more than 20% of the cement consumption) is low compared to developed countries. However, the potential and scope for future growth in this business is enormous. The growth is being fuelled by the increased thrust on infrastructural activities within the country. It must be noted that the company divested some of its subsidiaries in CY06, which have contributed to the extraordinary income.

Costs still a concern: ACC continues to face pressure on most of the operating heads. Though the costs as a percentage of sales are lower, they have increased on cost per tonne basis by 17% YoY. Its employee rationalization programme has helped the company curtail costs to some extent. While on cost per tonne basis raw materials and staff costs declined by 18% YoY and 6% YoY respectively, power & fuel costs and freight and forwarding charges registered a sharp increase on the back of rising input costs like coal and petro products. Thus, besides improved realisations, the 61% YoY growth in operating profits was achieved mainly on account of higher sales of blended cement and cost reduction measures such as using alternative fuels.

Increase/Decrease in stock 1QCY06 1QCY07
Consumption of raw materials 17.1% 10.9%
Staff cost 6.6% 4.9%
Power and fuel 17.3% 15.9%
Outward freight 15.1% 15.4%
Other expenditure 19.0% 19.5%
Excise duty 0.4% 2.4%
Purchase of cement and other products 0.8% 0.8%
Total expenses 76.3% 69.7%

Bottomline outperforms topline: The company has reported 55% YoY growth in net profits on the back of extraordinary income and fall in interest cost (debt to equity ratio has fallen from 0.5 times in CY05 to 0.3 times in CY06). Excluding the extraordinary item, the bottomline for the quarter has grown by 46% YoY.

What to expect?
Riding on the back of strong growth in the housing industry and the government’s initiatives in the infrastructure sector, the cement industry is expected to grow at around 8% to 10% per annum provided GDP grows at 7% to 8% in the coming years. To cash in on the favorable prospects, cement producers have lined up capacity expansion plans either by brownfield or greenfield expansion route. Capacity additions announced till date will add up approximately 75 MT to the existing capacity (165 MT), the bulk of which start flowing in next calendar year onwards exerting downward pressure on cement prices. At the current juncture, we believe growth has already been factored in and risks outweigh rewards.

Going forward, the benefits of being associated with Holcim would be visible in terms of improvement in the areas such as logistics, product portfolio management etc. ACC has outlined capex to the tune of Rs 40 bn to expand capacity by almost 7.5 MT, set up ready mix units and captive power plants. At the current price of Rs 785, the stock is trading at an expensive valuation of about US$ 109 on the enterprise value per tonne (EV/tonne) basis as per our CY09 estimates.

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