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ACC: Slackness in cement demand - Views on News from Equitymaster
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ACC: Slackness in cement demand
May 21, 2015

ACC has announced its financial results for the first quarter of the calendar year 2015. During the quarter ended March 2015, the company's standalone sales and net profit decreased by 2.8% YoY 39.7% YoY respectively. Here is our analysis of the results:

Performance summary
  • On a standalone basis, net sales decreased by 2.8% YoY during the quarter on account of poor cement demand.
  • Operating profit increased by 13.2% YoY; EBITDA margin expanded from 12.3% in 1QCY14 to 14.3% in 1QCY15.
  • Net profit decreased by 39.7% YoY during the quarter.

Standalone financial performance snapshot
(Rs m) 1QCY14 1QCY15 Change
Net sales 29,671 28,854 -2.8%
Expenditure 26,018 24,718 -5.0%
Operating profit (EBITDA) 3,653 4,137 13.2%
EBITDA margin 12.3% 14.3%  
Other income 1,930 2,538 31.5%
Depreciation 1,366 1,698 24.4%
Interest 371 226 -38.9%
Profit before tax & exceptional items 3,848 4,750 23.4%
Exceptional gain/ (loss)  - (1,532)  
Profit before tax 3,848 3,218 -16.4%
Tax (140) 813 NA
Effective tax rate NA 25.2%  
Profit after tax 3,987 2,406 -39.7%
Net profit margin 13.4% 8.3%  
No of shares (m) 187.7 187.7  
Diluted EPS (Rs)*   58.4  
P/E (times)   25.7  
*trailing twelve month earnings

What has driven performance in 1QCY15?
  • On a standalone basis, ACC's net sales decreased by 2.8% YoY during the quarter ended March 2015. Sales volumes declined by 10.2% YoY from 6.48 million tonnes in 1QCY14 to 5.82 million tonnes in 1QCY15. However, cement realisations improved on a year-on-year basis.

  • On the cost front, there was a significant decline in raw material costs. This resulted in an expansion in the operating profit margin from 12.3% in 1QCY14 to 14.3% in 1QCY15.

    Operating cost break-up
    (Rs m) 1QCY14 1QCY15 Change
    Raw materials consumed 4,615 4,637  
    Purchases of stock-in-trade 340 360  
    Change in inventory 435  (733)  
    Total raw materials cost 5,391 4,264 -20.9%
    % of net sales 18.2% 14.8%  
    Employee expenses 1,691 1,710 1.1%
    % of net sales 5.7% 5.9%  
    Power & fuel expenses 6,092 6,214 2.0%
    % of net sales 20.5% 21.5%  
    Freight & forwarding expenses 6,675 6,859 2.8%
    % of net sales 22.5% 23.8%  
    Other expenses 6,170 5,672 -8.1%
    % of net sales 20.8% 19.7%  
    Total operating expenditure    26,018    24,718 -5.0%
    % of net sales 87.7% 85.7%  

  • Other income increased by 31.5% YoY during 1QCY15.

  • While depreciation charges increased by 24.4% YoY, interest expenses fell sharply by 38.9% YoY.

  • The company reported an exceptional loss of Rs 1,532 million during the quarter on the back of certain revisions on account of the provisions of the Companies Act, 2013.

  • As against tax credit of Rs 140 million in 1QCY14, there was a tax outgo of Rs 813 million during 1QCY15.

  • On account of the exceptional loss and the jump in tax outgo, the net profit declined by 39.7% YoY. Net profit margin contracted from 13.4% in 1QCY14 to 8.3% in 1QCY15.
What to expect?

ACC's performance during the quarter ended March 2015 was dismal on account of slack cement demand from the infrastructure and the general construction sector. The short to medium term outlook for cement demand appears challenging owing to excess cement capacity of roughly 120 million tonnes.

However, with the overall macroeconomic indicators showing signs of improvement and Government's thrust on housing and infrastructure, cement demand is expected to revive over the medium to long term. Moreover, easing commodity prices and lower interest rates should augur well for cement demand in India.

At the current price, the stock is trading at 25.7 times its trailing twelve month standalone earnings. We had recommended 'Buy' on ACC in our StockSelect dated May 31, 2013. Since our recommendation, the stock is up 23%. We are currently in the process of preparing the CY17 earnings forecasts of the company. We will share our latest view and target price on the company in the upcoming monthly performance review.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also, within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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