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ACC: The extraordinary impact! - Views on News from Equitymaster
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ACC: The extraordinary impact!
Jul 19, 2007

Performance summary
  • The company achieved 27% YoY growth in topline during 2QCY07 on the back of higher volumes (increased by 11% YoY) and improved realisations (increased 15% YoY).

  • Operating margins have contracted by almost 280 basis points (2.8%) on account of almost 32% YoY growth in operating costs.

  • Due to an extraordinary income during same quarter last year, net profits have fallen by 15% YoY. However, they show an improvement of 32% YoY if one excludes the same.

  • Has declared interim dividend of Rs 10 per share.

Financial performance snapshot
(Rs m) 2QCY06 2QCY07 Change 1HCY06 1HCY07 Change
Net sales 14,688 18,680 27.2% 28,112 35,428 26.0%
Expenditure 9,998 13,236 32.4% 20,157 24,912 23.6%
Operating profit (EBITDA) 4,690 5,444 16.1% 7,955 10,515 32.2%
EBITDA margin 31.9% 29.1%   28.3% 29.7%  
Other income 122 283 131.8% 455 567 24.5%
Interest 147 (23) -115.4% 341 17 -95.0%
Depreciation 582 633 8.8% 1,179 1,255 6.4%
Profit before tax/(loss) 4,082 5,116 25.3% 6,891 9,811 42.4%
Extraordinary items 1,466 -   1,557 200  
Tax 1,416 1,604 13.3% 1,961 2,860 45.8%
Net profit 4,132 3,512 -15.0% 6,487 7,150 10.2%
Net profit margin 28.1% 18.8%   23.1% 20.2%  
No of shares (m)       187 187  
Diluted EPS (Rs)*         69.4  
P/E (times)         16.5  
*trailing twelve month earnings

What is the company’s business?
Associated Cement Companies (ACC), India's foremost manufacturer of cement and concrete, with a total capacity of approximately 20 MT (12% of domestic capacity). With 14 plants and a 9,000 strong dealer network, ACC is one of the few companies to have a pan-Indian production 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 43% stake in the company.

What has driven performance in 2QCY07?
Favourable pricing scenario: For 2QCY07 and 1HCY07, cement volume sales were higher by 11% YoY and 6% YoY respectively. However, revenues were higher by 27% YoY and 26% YoY during second quarter and half year ended June 2007. Despite monsoon season, the company’s volume sales during the quarter grew by 11% YoY on account of sustained demand for the commodity. As the demand for cement has continued to remain robust across regions in the country and supply failing to match up to the demand requirements, cement prices have been moving northwards. Hence, apart from growth in volumes, higher realizations also played a part in propping up revenues (increased by almost 15% YoY and 20% YoY during 2QCY07 and 1HCY07 respectively).

Higher input costs dent margins: On account of rising costs of operations, the EBITDA margins came under pressure during the quarter as they declined by 280 basis points to stand at 29%. The company continued to face pressure on most of the operating cost heads, as is evident from the table below. While the company tries to improve margins by curtailing costs or increasing product mix, rising input costs such as fuel prices and freight and forwarding charges pressurise operating margins of the company. However, during 1HCY07, operating profits outpaced topline growth on account of higher realisations.

Cost break- up
(% of sales) 2QCY06 2QCY07 1HCY06 1HCY07
Consumption of raw materials 8.1% 13.1% 12.4% 12.1%
Staff cost 6.3% 5.0% 6.0% 5.0%
Power and fuel 17.3% 15.3% 17.2% 15.5%
Outward freight 14.8% 13.5% 14.9% 14.4%
Other expenditure 17.9% 21.0% 18.7% 20.3%
Excise duty 2.5% 1.4% 1.5% 1.8%
Purchase of cement and other products 1.1% 1.5% 0.9% 1.2%
Total expenses 68.1% 70.9% 71.7% 70.3%

Extraordinary Impact: Due to an extraordinary income during same quarter last year, net profits have fallen by 15% YoY. However, they show an improvement of 32% YoY if one excludes the same. For 1HCY07, the net profits grew by 10% YoY and if extraordinary effect (profit on sale of land and profit on sale of Mancherial cement plant) is excluded, they soar 41% YoY. The 41% YoY growth in net profits is also a result of lower finance charges apart from higher other income and improved realisations.

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 in the coming years. To cash in on the favorable prospects, cement producers have lined up capacity expansion plans, which will start flowing in 2008. Thus, in near to medium term, cement realisations will continue to be on higher side. However, at the current level, we believe much of growth has already been factored in and hence suggest caution.

At the current price of Rs 1,145, the stock is trading at about US$ 167 on the enterprise value per tonne (EV/tonne) basis as per our CY09 estimates, which we feel is an expensive valuation considering the replacement cost.

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