Of late, cement sector seems to be in the limelight on the bourses. While ACC has outperformed the BSE Sensex in the last six months, it still lags behind its peers like Gujarat Ambuja, L&T and Madras Cement on the bourses. In this article, we consider ACC’s fundamental strengths and weakness along with future growth prospects.
ACC is the oldest cement producer in the country and with a capacity of 16 m tones (13% of India capacity). The company is strong in the northern, the eastern and the western regions. Following the acquisition of around 15% stake by Gujarat Ambuja in ACC, the latter has acquired significant pricing muscle in the said regions. The company also stands to gain from the project execution and cost reduction capabilities of Gujarat Ambuja whereas Gujarat Ambuja can benefit from the R&D capabilities of ACC (the company is a pioneer of ready mix cement). After incurring losses in FY01, the company has bounced back to profitability in the last two years. This has been led by strong demand for cement combined with the cost reduction efforts undertaken by the management.
As a result of the government initiatives on the infrastructure sector front and a robust housing sector, cement demand is expected to grow by 9% and this will benefit all the major players, including ACC.
The enhancement of captive power consumption to 83% and efficient power utilization will translate into savings of around Rs 150 per tonne of cement manufactured for the company in the future. Besides, ACC has also been focusing on improving employee productivity that has translated into higher margins at the operating level. Though operating margins fell in FY03 due to significant pricing pressure, we expect a sharp rise in FY04.
The company’s strategy to realign debt and improve working capital management will help in reducing interest incidence significantly in the future. To put things in perspective, interest costs fell by 26% in FY03.
The ready mix concrete (RMC) business, a concept pioneered by ACC, is gaining acceptance in most large cities and shows promising potential. The profit and interest before tax of the company’s RMC division increased from Rs 1 m in FY02 to Rs 88 m in FY03 (7% of PBIT).
ACC’s debt to equity ratio of 1.5 times in FY03 is still on the higher side and can make it vulnerable to rapid fluctuations in cement prices.
Restructuring program undertaken by the management has been going on for quite some time now and with the competition in the sector hotting up, the company needs to accelerate this process.
There is lack of clarity over Gujarat Ambuja’s 15% holding in ACC.
The stock is currently trading at Rs 167 implying a P/E multiple of 27.1x FY03 earnings. Though valuation seems to be on the higher side, it must be remembered that ACC has relatively poor operating and net margins compared to the likes of Gujarat Ambuja. Just to put things in perspective, the net margin of Gujarat Ambuja is at 13% levels compared to a paltry 4% for ACC in FY03. Though one does not expect ACC to reach the efficiency standards of Gujarat Ambuja in the medium-term, the potential of growth in profitability is high.
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