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ACC: Pricing edge still persists

Jul 23, 2009

Performance summary
  • On a standalone basis, revenues grow by a robust 15.7% YoY led by higher realisations.
  • Cost of operation declines by 3% YoY on account of focused cost control measures. This resulted in 12.5% expansion in EBITDA margins.
  • Profits before tax excluding extraordinary items grow by 84% YoY.
  • Net profits growth of 78.9% YoY exceeds growth in operating profits as result of less than proportionate growth in depreciation and interest costs.
  • The board has recommended a dividend of Rs 10 per share.

Financial performance snapshot
(Rs m) 2QCY08 2QCY09 Change 1HCY08 1HCY09 Change
Net sales 18,326 21,199 15.7% 36,609 42,016 14.8%
Expenditure 13,933 13,476 -3.3% 27,190 27,553 1.3%
Operating profit (EBITDA) 4,393 7,723 75.8% 9,419 14,463 53.6%
EBITDA margin 24.0% 36.4%   25.7% 34.4%  
Other income 215 184 -14.6% 551 426 -22.7%
Interest 108 159 47.4% 164 527 221.8%
Depreciation 724 784 8.2% 1,438 1,573 9.4%
Profit before tax/(loss) 3,776 6,963 84.4% 8,368 12,788 52.8%
Extraordinary items 123 -   489 - -100.0%
Profit from extraordinary activities 3,899 6,963 78.6% 8,857 12,788 44.4%
Tax 1,185 2,107 77.9% 2,567 3,884 51.3%
Net profit 2,714 4,856 78.9% 6,290 8,904 41.6%
Net profit margin 14.8% 22.9%   17.2% 21.2%  
No of shares (m)       188 188  
Diluted EPS (Rs)*         78.5  
P/E (times)         10.9  
*trailing twelve month earnings

What has driven performance in 2QCY09?
  • On a standalone basis, ACC reported 15.7% YoY growth in topline during 2QCY09 primarily due to better realisations. During the period under consideration, the company has witnessed 2.1% YoY growth in dispatches. From this it is clear that growth has been mainly led by firm prices, as revenue is a function of volumes and prices. The strong demand for the commodity seems to have upheld its price. Apart from the stimulus packages announced by the government, delayed monsoons have sustained the demand for the commodity.

    Cost break- up
    ( % of sales) 2QCY08 2QCY09 1HCY08 1HCY09
    Consumption of raw materials 10.6% 11.7% 12.4% 12.7%
    Staff cost 5.4% 4.6% 4.9% 4.2%
    Power and fuel 22.7% 17.6% 20.7% 18.7%
    Outward freight 14.2% 12.0% 13.8% 12.7%
    Other expenditure 23.2% 17.6% 22.5% 17.3%

  • Operating profits reported a whopping 75.8% YoY growth in 2QCY09. This strong growth has been on account of higher realisations and lower costs. The company’s focused cost control measures have paved the way for bringing down the overall cost of operation. Recently, the cost of operation went up largely on account of higher fuel prices and higher power costs. The higher utilization of captive power enabled the company keep check on rising costs of operations.

  • Profit before tax excluding extraordinary items grew by 84% YoY. Including these items, the growth stands at 78.6% YoY. During the same quarter last year, the company had earned extraordinary income.

  • Apart from the robust growth at the operating level, less than proportionate growth in depreciation and interest costs gave a boost to net profits. The bottomline has grown by 78.9% YoY.

What to expect?
ACC’s expansion plans are progressing as per schedule. The recently announced stimulus packagesand government initiatives to boost rural development, infrastructure and housing is likely to support growth of the industry. However, apart from resulting in reduction in utilization levels, the upcoming capacities are expected to exert downward pressure on cement prices,

At the current price of Rs 855, the stock is trading at an EV/tonne of round Rs 5,000 based on our CY10 estimates. The company has reported a striking performance on account of firm prices and its focused efforts to rein in cost pressures. However, these firm realisations are not sustainable over the medium term as bulk of the additional capacities, which are expected to go on stream starting second half of CY09, commence operations. We shall soon update our research report on the company. Moreover, the management has also indicated that prices of major inputs may rebound because of an anticipated uptrend in commodity business cycle. Also, below normal monsoons may put pressure on prices of certain commodities, which may accelerate inflation.

While the company has outperformed our estimates, we maintain our view on the stock. Considering the sector growth prospects over the next two years and the asset valuation method, we suggest investors to practice caution. Commodity stocks are valued at their replacement cost as it is the likely price at which one would be interested in acquiring the cement company.

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