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ACC: Strong quarter but future still uncertain - Views on News from Equitymaster

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ACC: Strong quarter but future still uncertain
Apr 20, 2012

ACC has announced its results for the first quarter of the calendar year 2012 (1QCY12). The company has reported 19% YoY rise in sales and 56% decline in net profits during the quarter. Here is our analysis of the results:

Performance summary
  • On a standalone basis, net sales increase by 19% YoY during the quarter.
  • Higher power & fuel costs push operating margins lower by 1.6% YoY (160 basis points).
  • Other income is higher by 41.7% YoY, while interest costs increase by 25% YoY.
  • There is an exceptional item due to the change in deprecation method adopted by the company for fixed assets pertaining to Captive Power Plants. As a result, net profits drop by 56% YoY.

Standalone financial performance snapshot
(Rs m) 1QCY11 1QCY12 Change
Net sales 23,982 28,602 19.3%
Expenditure 18,439 22,442 21.7%
Operating profit (EBITDA) 5,542 6,161 11.2%
EBITDA margin 23.1% 21.5%  
Other income 669 948 41.7%
Depreciation 1,125 1,305 16.0%
Interest 253 316 25.0%
Profit before tax & exceptional items 4,834 5,487 13.5%
Exceptional gain/ (loss) - (3,354)  
Tax 1,327 580 -56.3%
Net profit 3,507 1,554 -55.7%
Net profit margin 14.6% 5.4%  
No of shares (m) 187.7 187.7  
Diluted EPS (Rs)*   60.2  
P/E (times)   20.4  
*trailing twelve month earnings

What has driven performance in 1QCY12?
  • On a standalone basis, ACC's net sales rose by 19.3% YoY during the quarter ended March 2012. The rise in revenue was led by 9.3% YoY rise in sales volume and about 10% improvement in cement realisations.

  • On the cost front, Power and fuel costs witnessed a rise of 3.7% as a percentage of net sales. As a result, operating profit grew at a slower rate of 11.2% YoY. Operating margins declined from 23.1% in 1QCY11 to 21.5% in 1QCY12.

  • Other income rose by 41.7% YoY during the quarter on account of incentives and sales tax written back which pertained to prior years. On the other hand, interest costs were also higher by 25% YoY during the period. Profit before tax and exception items rose by 13.5% YoY.

  • During 1QCY12, ACC retrospectively changed its depreciation method on fixed assets pertaining to Captive Power Plants because of which there was an additional depreciation charge. The amount pertaining to earlier years has been reported by the company as an exceptional item. Owing to this, ACC's profit after tax dipped by 55.7% YoY. If not for the change in depreciation method, the net profit for the current quarter would have been higher by Rs. 2,305.6 m. The net profit margin declined from 14.6% in 1QCY11 to 5.4% in 1QCY12.

  • ACC's Board of Directors has approved amalgamation of its wholly owned subsidiary ACC Concrete Ltd with itself with effect from January 01, 2012.

What to expect?
ACC posted healthy topline growth for the quarter ended March 2012. The growth was equally driven by increases in volumes and cement prices. But it must be noted that the March quarter typically witnesses higher sales despatches on account of robust construction activity during this period. However, whether the demand will be able to hold in the medium term remains to be seen; especially, because cement sales and prices tend to fall during the monsoon season. At the same time, cost pressures continue to persist.

The Competition Commission of India (CCI) had alleged 39 cement companies for influencing cement prices by forming cartels. Though the final report is not out yet, there are chances that guilty companies could be fined. This could have a negative impact on cement prices going forward.

At the current price of Rs 1,226, the stock of ACC is trading at an enterprise value per tonne (EV/tonne) of Rs 5,290 based on our CY14 estimates. At these valuations, the expected return over the next three years is about 5.1% compound annual growth rate (CAGR). As such, we maintain a cautious view on the stock from a 2-3 year perspective.

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