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ACC: Sluggish demand, muted realisations - Views on News from Equitymaster
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ACC: Sluggish demand, muted realisations
Jul 20, 2015

ACC has announced its financial results for the second quarter of the calendar year 2015. During the quarter ended June 2015, the company's standalone sales and net profit decreased by 1.6% YoY 45.5% YoY respectively. Here is our analysis of the results:

Performance summary
  • On a standalone basis, net sales decreased by 1.6% YoY during the quarter on account of poor cement demand.
  • Operating profit decreased by 30.1% YoY; EBITDA margin contracted from 13.3% in 2QCY14 to 9.4% in 2QCY15.
  • Net profit decreased by 45.5% YoY during the quarter.

Standalone financial performance snapshot
(Rs m) 2QCY14 2QCY15 Change 1HCY14 1HCY15 Change
Net sales 30,090 29,612 -1.6% 59,761 58,467 -2.2%
Expenditure 26,090 26,817 2.8% 52,108 51,535 -1.1%
Operating profit (EBITDA) 4,000 2,795 -30.1% 7,653 6,931 -9.4%
EBITDA margin 13.3% 9.4%   12.8% 11.9%  
Other income 934 775 -17.0% 2,865 3,313 15.6%
Depreciation 1,377 1,657 20.3% 2,743 3,355 22.3%
Finance cost 169 143 -15.6% 540 369 -31.6%
Profit before tax & exceptional items 3,388 1,771 -47.7% 7,236 6,520 -9.9%
Exceptional gain/ (loss) - -   - (1,532)  
Profit before tax 3,388 1,771 -47.7% 7,236 4,989 -31.1%
Tax 978 456 NA 838 1,269 NA
Effective tax rate 28.9% 25.8%   11.6% 25.4%  
Profit after tax 2,410 1,314 -45.5% 6,398 3,720 -41.9%
Net profit margin 8.0% 4.4%   10.7% 6.4%  
No of shares (m) 187.7 187.7   187.7 187.7  
Diluted EPS (Rs)*         48.0  
P/E (times)         30.1  
*based on trailing 12 months earnings

What has driven performance in 2QCY15?
  • On a standalone basis, ACC's net sales decreased by 1.6% YoY during the quarter ended June 2015. Sales volumes declined by 2.4% YoY from 6.35 million tonnes in 2QCY14 to 6.20 million tonnes in 2QCY15.

  • Poor cement realisations and persistent cost increases resulted in a contraction in the operating profit margin from 13.3% in 2QCY14 to 9.4% in 2QCY15.

    Operating cost break-up
    (Rs m) 2QCY14 2QCY15 Change
    Raw materials consumed 4,360 4,569  
    Purchases of stock-in-trade 520 281  
    Change in inventory 153 179  
    Total raw materials cost 5,033 5,029 -0.1%
    % of net sales 16.7% 17.0%  
    Employee expenses 1,936 2,003 3.4%
    % of net sales 6.4% 6.8%  
    Power & fuel expenses 6,207 6,101 -1.7%
    % of net sales 20.6% 20.6%  
    Freight & forwarding expenses 6,755 7,397 9.5%
    % of net sales 22.5% 25.0%  
    Other expenses 6,158 6,288 2.1%
    % of net sales 20.5% 21.2%  
    Total operating expenditure 26,090 26,817 2.8%
    % of net sales 86.7% 90.6%  

  • Other income decreased by 17% YoY during 2QCY15.

  • While depreciation charges increased by 20.3% YoY, finance costs fell 15.6% YoY.

  • Owing to the poor operating performance, the net profit declined by 45.5% YoY. Net profit margin contracted from 8% in 2QCY14 to 4.4% in 2QCY15
What to expect?

After a disappointing start to the new calendar year, ACC reported another dismal quarter. The slackness in cement demand is evident from the 6.3% YoY drop in cement sales volume for the first half of the calendar year 2015. There has been a lull in construction activity owing to weak expenditure in the housing and infrastructure sectors which are the key drivers of cement demand. At the same time, the substantial overcapacity in the cement sector is drawing in heavy competition and impacting cement prices. The company expects cement demand to recover gradually over the next couple of quarters. An expected recovery in the macroeconomy, government's focus on infrastructure development and new projects of Smart Cities and Housing For All will be key triggers for uptick in cement demand in the coming times. Further softening of interest rates may also revive retail home buying.

The company's board of directors has approved an interim dividend of Rs 11 per equity share of face value Rs 10. It must be noted that the interim dividend for the current year is lower than the previous year (interim dividend of Rs 15 per share in 2014).

At the current price, the stock is trading at 30.1 times its trailing twelve month standalone earnings. Please note that in our StockSelect report dated 26 May 2015, we had shared our updated target price of Rs 1,785 based on CY17 estimates. Given the current stock price level and the expected returns, we continue to recommend a 'Hold' view on ACC.

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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