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ACC: Focusing on core business - Views on News from Equitymaster

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ACC: Focusing on core business
Apr 24, 2008

Performance summary
  • Revenue grows by 7% YoY. The despatches during the quarter grew by 9.5% YoY.

  • Operating profits declined by 7% YoY as operating costs grew at faster pace compared to topline growth.

  • Higher other income and extraordinary income (profit on sale of land & buildings and sale of investment in associates & subsidiaries) have restricted fall in net profits. If one excludes the same, the fall in net profits is to the tune of 13% YoY.

  • During the quarter, the company has sold its subsidiary ACC Machinery incurring profit on sale to the tune of Rs 369 m.

  • The company, towards the end of the quarter has purchased 40% of the equity of ALCON Cement Company Pvt. Ltd (ALCON) for a consideration of Rs 223 m, with whom it had an arrangement for trading cement for the past several years. ALCON has a cement grinding facility situated at Goa.

  • The company has transferred its RMC business to its newly formed wholly owned subsidiary called ACC Concrete. As such, the results are not strictly comparable on year on year basis.

Financial performance snapshot
(Rs m) 1QCY07 1QCY08 Change
Net sales 16,750 17,958 7.2%
Expenditure 11,676 13,252 13.5%
Operating profit (EBITDA) 5,073 4,706 -7.2%
EBITDA margin 30.3% 26.2%  
Other income 535 656 22.7%
Interest 170 56 -67.3%
Depreciation 744 714 -4.1%
Profit before tax/(loss) 4,694 4,593 -2.2%
Extraordinary items 77 366  
Tax 1,215 1,383 13.8%
Net profit 3,557 3,575 0.5%
Net profit margin 21.2% 19.9%  
No of shares (m)   188  
Diluted EPS (Rs)*   72.8  
P/E (times)   10.9  
*trailing twelve month earnings

What has driven performance during 1QCY08?
  • Revenues have grown by 7% YoY in 1QCY08. The net sales have been impacted by introduction of VAT (value added tax) introduced in the state of Uttar Pradesh with effective from January 1st, 2008, which otherwise would have been higher by Rs 276 m. If we adjust RMX sales turnover for previous quarter in order to make it comparable, then the growth in net sales on a year on year basis works out to almost 13%, indicating an improvement in realisations in the region of 3% YoY.

  • The growth in volumes is in line with industry growth of almost 9% YoY during the period under consideration. This is despite the fact that last year in February, production and despatches of the company were affected to some extent due to planned stoppages on account of certain technical modifications carried out at three plants. Had the last year been a quarter of normal operations then the 1QCY08 volume growth would have been a tad lower.

    Cost break up
    (% of sales) 1QCY07 1QCY08
    Consumption of raw materials 11.2% 13.7%
    Staff cost 4.4% 4.4%
    Power and fuel 15.7% 18.3%
    Outward freight 15.0% 13.6%
    Other expenditure 20.2% 20.7%
    Excise duty 2.4% 1.6%
    Purchase of cement and other products 0.8% 1.5%

  • Rising costs of inputs such as coal and gypsum have continued to exert pressure on operating profits. Coal prices have ascended by 31% in the current quarter as compared to the same period last year. While the company managed to reduce outward freight costs, rising power costs have adversely affected operating margins. On an overall basis, costs as a percentage of sales basis have increased to 73.8% in the current quarter from 69.7% in 1QCY07, resulting in a 410 basis point (4.1%) contraction in EBITDA margins.

  • While growth in operating profits is displeasing, net profits were steady, mainly supported by higher other income and extraordinary income (profit on sale of land & buildings and sale of investment in associates & subsidiaries). If one excludes the same, the fall in net profits is to the tune of 13% YoY. Though financing costs and depreciation charges were lower, increased tax (14% YoY growth) has further exerted pressure on margins, apart from the dismal show at the operating level.

What to expect?
At the current price of Rs 795, the stock is fairly valued at US$ 86 on the enterprise value per tonne (EV/tonne) basis as per our CY11 estimates.

The industry is likely to maintain its growth momentum and continue growing volumes at around 8% to 10% in the medium to long term. The upcoming planned capacities are however, likely to exert pressure on the realisations, impacting margins. The company has also been a party to the capacity addition taking place within the industry and has added 2.5 MT of capacity in CY07 and would add another 7.2 MT capacity in next two to three years. Further, escalating costs need to be checked in order to support profitability. While valuations have corrected to some extent, considering the above-mentioned factors it would be wise to take a cautious stand.

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