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ACC: Riding on realisations

Jul 22, 2004

Introduction to results
ACC, the country's second largest cement player, has reported robust 1QFY05 results. During the quarter, while the topline of the company has grown by 17% YoY, the bottomline has grown at a faster rate of 84%, thanks mainly to a strong 14% growth in realisations and significant reduction in interest outgo.

(Rs m) 1QFY04 1QFY05 Change
Net sales 8,098 9,479 17.1%
Other income 189 145 -23.2%
Expenditure 6,876 7,858 14.3%
Operating profit (EBDITA) 1,222 1,621 32.6%
Operating profit margin (%) 15.1% 17.1%  
Interest 250 209 -16.3%
Depreciation 436 439 0.8%
Profit before tax 726 1,119 54.0%
Extraordinary items (125) - -
Tax 160 306 91.4%
Profit after tax/(loss) 441 812 84.1%
Net profit margin (%) 5.5% 8.6%  
No. of shares (m) 171.3 178.4  
Diluted earnings per share (Rs)* 9.9 18.2  
P/E (x)   12.6  
(* annualised)      

What is the company's business?
Associated Cement Companies (ACC) is the oldest cement manufacturer in the country. It has a total capacity of nearly 17 million tonnes (12% of total Indian capacity) and is the second largest player in the Indian market. With 12 plants and a 9,000 strong dealer network, ACC is one of the few cement companies to have a pan-India presence. It is particularly strong in the northern and the eastern regions with capacity shares of 16% and 8% respectively.

What has driven performance in 1QFY05?
Sales:Sales volumes were marginally higher as compared to the corresponding previous period. However, realisations were higher by almost 14% and this explains the strong growth in topline. It should be remembered that there has been no significant greenfield expansion in the past year or so and this has helped in reducing the demand supply parity and consequently boosting the prices. ACC, being the market leader and having a pan-India presence has benefited from such a trend.

Operating margin: Despite cost related pressures on key raw materials such as coal and gypsum and increase in the prices of petroleum products, operating margins of the company have improved by 200 basis points. Improved operating efficiencies and increased use of captive power consumption has helped to more than mitigate the effect of the same and thus the improvement in margins.

Cost break-upů
(Rs m) 1QFY04 1QFY05 Change
Raw materials 1,107 1,005 -9.2%
% sales 13.7% 10.6%  
Freight 1,134 1,272 12.1%
% sales 14.0% 13.4%  
Power and fuel 1,870 2,015 7.8%
% sales 23.1% 21.3%  
Staff cost 476 522 9.8%
% sales 5.9% 5.5%  
Other expenses 2,289 3,045 33.0%
% sales 28.3% 32.1%  

Net profits: Besides improved operating performance, better working capital management and substitution of high cost debt has resulted into a further improvement in profitability, as evident from a significant 310 basis points jump in net profit margins and 84% surge in terms of absolute net profit numbers.

Over the last few quarters: After a lackluster 1HFY04, demand for cement picked up during the second half and the company was able to take advantage of such a scenario as is evident from the growth in topline. Besides, the operating margins of the company have also seen a steady rise. While the company is trying hard to improve cost efficiencies, improved pricing environment has also helped to prop margins on account of its higher operating leverage.

What to expect?
The stock is currently trading at Rs 229, implying a P/E of 13x annualised 1QFY05 earnings. Given the company's high sensitivity to cement prices, it will be the foremost beneficiary of a rise in the same. However, should the prices remain at the current levels or rise at a slower rate, investors need to exercise caution and look for more cost efficient and larger players to cash in on the industry growth story.

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