ACC, the largest cement producer in India, has announced disappointing results for 1QFY03. The company has reported a 55% drop in net porfits, while the total revenues have grown marginally by 2% on a YoY basis. These results are especially disappointing considering that cement shipments by the company over the last few months have been impressive. However, there has been a severe pressure on realisations.
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The company has managed to post a decent topline growth considering the fact that cement demand tends to slow down in the monsoon season (June-September). Due to poor monsoons, construction activity has been normal in the northern regions where ACC has a major exposure. For the first quarter, the company managed to increase its dispatches by 22% on a YoY basis but depressed realisations have ensured a flat topline growth. The company has stated that the realisations have decreased by 13% on a YoY basis.
On the operational front, ACC has reported a 11% increase in its total expenditure. The operational costs for the company have gone up considerably primarily on account of higher raw material consumption, freight costs and coal usage. Increased production may be the main reason for this sharp spurt in expenses. However, the fall in margins has to be viewed in the context of commissioning of its new plant.
ACC has managed to keep the interest expenses in check but the provision for depreciation has gone up considerably (up 15%). The increase in depreciation can be mainly attributed to the comissioning of the new 2.5 m tonne cement plant at Wadi in Karnataka.
The stock is currently trading at Rs 138 at a P/E of 29x FY03 annualised earnings. The company has been severly affected by the drop in realisations due to the oversupply condition prevailing in the country. ACC is likely to witness strong volume growth in the coming quarters as well. But depressed realisations is likely to result in sluggish turnover growth for FY03. However, over the long run, we expect the company to post better profitability. At the same time, considering the commodity nature of its business and subdued realisations, valuations seem to be on the higher end of the spectrum.
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