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ACC: Last quarter sprint...

May 6, 2004

On account of robust performances by cement majors such as Gujarat Ambuja and Grasim, ACC, the second largest cement producer in the country, witnessed significant buying interest over the last few days. Perhaps, investors were expecting the company to replicate the performance of its peers. Gauging by the company's 4QFY04 and FY04 results, it seems to have done little to belittle those expectations. Helped strongly by a fourth quarter push, the topline of the company has grown by a healthy 15% during FY04 on a YoY basis. On account of improvement in demand as well as realisations and also improved productivity, the bottomline of the company has grown at a higher rate of 93% during the same period. For 4QFY04, while the topline of the company has witnessed a strong 30% YoY rise, the bottomline has surged 80%. The company has announced a dividend of 40% for the full year.

(Rs m) 4QFY03 4QFY04 Change FY03 FY04 Change
Net sales 7,418 9,630 29.8% 28,604 32,845 14.8%
Other income 480 771 60.7% 1,104 1,505 36.3%
Expenditure 6,638 8,275 24.7% 25,672 29,011 13.0%
Operating profit (EBDITA) 779 1,354 73.8% 2,932 3,834 30.8%
Operating profit margin (%) 10.5% 14.1%   10.3% 11.7%  
Interest 207 208 0.7% 1,039 929 -10.6%
Depreciation 420 449 7.0% 1,646 1,769 7.5%
Profit before tax 633 1,468 132.1% 1,351 2,642 95.5%
Extraordinary items (30) 22 173.3% (170) (103) -39.3%
Tax 15 431 2700.0% 143 536 275.2%
Profit after tax/(loss) 587 1,059 80.3% 1,039 2,002 92.7%
Net profit margin (%) 7.9% 11.0%   3.6% 6.1%  
No. of shares (m) 177.9 171.1   177.9 171.1  
Diluted earnings per share (Rs)* 13.7 24.8   6.1 11.7  
P/E ratio (x)         25.0  
(* annualised)            

During the year, the despatches of the company have improved by 9% YoY, thus managing to outperform the industry, which grew at a much lower rate of 5.5%. Although, the growth is considerably lower than FY03 for ACC (15% last year), it would be pertinent to add that realisations have been much better this year. Average cement prices were higher by around 5% YoY. This is in stark contrast to FY03, where realisations for the company suffered a decline of 10%. Much of the growth in realisations has come about in the fourth quarter where they improved by a healthy 17% over 4QFY03. This could mainly be attributed to lack of any greenfield capacity expansion in FY04, thus resulting into narrowing of demand supply gap, consequently improving prices.

Going forward, on account of government initiatives in the infrastructure sector and large unmet demand for dwelling units, the industry is expected to log in a growth rate of 8%-9% from a medium term to long-term perspective. Moreover, with demand-supply gap on the wane and increased consolidation (top 6 players now account for close to 60% of industry capacity) taking place, the realisations are also likely to turn favorable and remunerative, thus benefiting companies like ACC, with a pan Indian presence.

The expenditure side...
(Rs m) 4QFY03 4QFY04 Change FY03 FY04 Change
Raw material consumed 906 1,448 59.9% 3,856 4,941 28.1%
% of sales 12.2% 15.0%   13.5% 15.0%  
Wages and salaries 502 537 7.1% 1,870 2,032 8.7%
% of sales 6.8% 5.6%   6.5% 6.2%  
Power and fuel 1,855 1,948 5.0% 7,061 7,441 5.4%
% of sales 25.0% 20.2%   24.7% 22.7%  
Freight and handling 1,051 1,305 24.2% 4,184 4,592 9.8%
% of sales 14.2% 13.5%   14.6% 14.0%  
Other Expenditure 2,325 3,038 30.6% 8,702 10,004 15.0%
% of sales 31.3% 31.5%   30.4% 30.5%  
Total 89.5% 85.9%   89.7% 88.3%  

While improved realisations have helped, the company has not done badly on the operational front either. Operating margins have improved by 360 basis points during the quarter, while the same improved by 140 basis points during the year. Pricing pressure on key raw materials such as coal and gypsum were offset by efficient utilisation of power and savings on the wages front. In the recent times, the company had embarked upon expansion of its captive power utilisation and as a result, the same had improved to 83% in FY03. The move seems to have paid dividends as the power expenses of the company have grown at a much slower rate than the growth in production. The installation of 15 MW power plant in Chaibasa, which is expected to come up in the current fiscal, would further help the company trim its energy costs.

Robust appreciation in the other income of the company as well as a reduction in the interest expenses on account of improved financial and working capital management has resulted into a healthy growth at the PBT levels. Despite higher provisioning for deferred taxes, the bottomline of the company has grown by a significant 93% during FY04 as compared to FY03.

The stock is currently trading at Rs 291, implying a P/E of 25x its FY04 earnings. The company's operating margins (important pre-requisite for a commodity and a capital intensive business like cement) compares poorly with that of its peers (refer to the chart above). And it has been a laggard for last four years. While this signifies an opportunity to improve margins, we believe that it has been hard to come by when one considers the historical track record.

Despite this, it is trading at a premium to its peers. However, the strength in the stock could be a factor of investor expectation that Gujarat Ambuja could hike its stake in the company, considering the fact the latter has an even stronger balance sheet post the conversion of the bond. Barring this, the risk-reward equation remains highly skewed towards risks.

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