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ACC: A subdued start to 2014 - Views on News from Equitymaster

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ACC: A subdued start to 2014
Jul 21, 2014

ACC has announced its financial results for the first quarter of the calendar year 2014. During the quarter ended March 2014, the company's standalone sales increased marginally by 2.1% YoY while net profits decreased by 8.9% YoY. Here is our analysis of the results:

Performance summary
  • On a standalone basis, net sales increased marginally by 2.1% YoY during the quarter as sales volumes remained almost flat.
  • Operating profits decline by 18.2% YoY as EBITDA margin contracts from 15.4% in 1QCY13 to 12.3% in 1QCY14.
  • Depreciation and interest expenses during the quarter remained almost near the same levels as in 1QCY13.
  • Net profits decrease by 8.9% YoY; net profit margins decline from 15.1% in 1QCY13 to 13.4% in 1QCY14.

Standalone financial performance snapshot
(Rs m) 1QCY13 1QCY14 Change
Net sales 29,060 29,671 2.1%
Expenditure 24,592 26,018 5.8%
Operating profit (EBITDA) 4,468 3,653 -18.2%
EBITDA margin 15.4% 12.3%  
Other income 1,475 1,668 13.1%
Depreciation 1,383 1,366 -1.3%
Interest 108 108 0.1%
Profit before tax & exceptional items 4,452 3,848 -13.6%
Exceptional gain/ (loss)  
Profit before tax 4,452 3,848 -13.6%
Tax 75 (140)  
Effective tax rate 1.7% NA  
Profit after tax 4,377 3,987 -8.9%
Net profit margin 15.1% 13.4%  
No of shares (m)   187.7  
Diluted EPS (Rs)*   56.3  
P/E (times)   26.3  
*trailing twelve month earnings

What has driven performance in 1QCY14?
  • On a standalone basis, ACC's net sales increased marginally by 2.1% YoY during the quarter ended March 2014. Cement sales volume increased slightly by 0.9% YoY from 6.42 m tonnes in 1QCY13 to 6.48 m tonnes in 1QCY14.

  • On the cost front, raw material costs witnessed a sharp increase of 4.1 YoY (as a percentage of net sales). , Freight & forwarding expenses too increased by 1.3% YoY (as a percentage of net sales). On the other hand, power and fuel expenses and other expenses decreased by 1.8% YoY and 0.8% YoY respectively (as a percentage of net sales). The operating margins contracted from 15.4% in 1QCY13 to 12.3% in 1QCY14.

    Operating cost break-up
    (Rs m) 1QCY13 1QCY14 Change
    Raw materials consumed 4,236 4,615  
    Purchases of stock-in-trade 318 340  
    Change in inventory  (478) 435  
    Total raw materials cost 4,076 5,391 32.3%
    % of net sales 14.0% 18.2%  
    Employee expenses 1,613 1,691 4.8%
    % of net sales 5.6% 5.7%  
    Power & fuel expenses 6,478 6,092 -6.0%
    % of net sales 22.3% 20.5%  
    Freight & forwarding expenses 6,151 6,675 8.5%
    % of net sales 21.2% 22.5%  
    Other expenses 6,275 6,170 -1.7%
    % of net sales 21.6% 20.8%  
    Total operating expenditure 24,592 26,018 5.8%
    % of net sales 84.6% 87.7%  

  • Other income increased by 13.1% YoY during 1QCY14. It must be noted that other income included an amount of Rs 560.1 m written back towards interest on income tax pertaining to prior years.

  • While depreciation charges declined marginally by 1.3% YoY, interest expenses remained flat.

  • As against tax expenses of Rs 75.3 m during 1QCY13, the company reported net tax credit of Rs 139.7 m in 1QCY14 on account of reversal of tax provision of Rs 1,127.5 m relating to earlier years.

  • At the bottomline level, net profits decreased by 8.9% YoY. Net profit margins contracted from 15.1% in 1QCY13 to 13.4% in 1QCY14.
What to expect?

As can be seen from the results of the first quarter of the calendar year 2014, there hasn't been any major recovery in the construction and infrastructure sector. At the same time, profit margins were subdued due to higher costs of major inputs such as coal, gypsum and fly ash.

The sluggishness in the housing and infrastructure sector is likely to persist over the medium term. Moreover, other big challenges in the form of high inflation and poor rainfall could further impede the recovery. With the new business-friendly government coming to power at the Centre, the economy is expected to pick up in the coming times. The medium term challenges, notwithstanding, the long term prospects for the Indian economy and the cement sector appear positive owing to the huge demand for housing and infrastructure in the country.

At the current price of Rs 1,480 the stock is trading at 26.3 times its trailing twelve month standalone earnings. We had recommended 'Buy' on ACC in our StockSelect dated May 31, 2013. Given the strong long term fundamentals and healthy balance sheet, we continue to maintain our 'Buy' view on the stock.

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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