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ACC: Operational gains

Jul 24, 2003

ACC, one of the largest cement companies in the country has reported robust results for the June quarter. The company has reported a 122% rise in bottomline on the back of a 7% rise in topline and significant fall in interest expenses. ACC has also reported strong improvement in its operating margins in the June quarter. But for the extraordinary expenses incurred by the company, the bottomline performance would have been even better.

(Rs m)1QFY031QFY04Change
Net Sales 7,529 8,052 6.9%
Other Income 88 189 114.6%
Expenditure 6,572 6,829 3.9%
Operating Profit (EBDIT) 957 1,223 27.8%
Operating Profit Margin (%)12.7%15.2%
Interest 343 250 -27.1%
Depreciation 407 436 7.1%
Profit before Tax295726145.9%
Extraordinary items - (125)
Tax 97 160 64.9%
Profit after Tax/(Loss) 198 441 122.5%
Net profit margin (%)2.6%5.5%
No. of Shares 171.0 171.0
Diluted Earnings per share*4.610.3
P/E Ratio 16.4
(* annualised)

ACC has indicated that volumes for the quarter have improved by 6%. This indicates that the improvement in realisations have been marginal if any. Considering that poor realisations have taken a toll on the operating margins and consequently the profitability of all cement companies in the last year, stabilization on this front augurs well for the company and the sector as a whole. From here on, we are likely to see an improvement in realisations. However volume growth for ACC seems to have slowed down a bit in the June quarter. For FY03 volume growth stood at 15% thus indicating the slowdown.

After holding ground in the March quarter, operating margins of ACC have shown improvement in the June quarter and they have returned to FY02 levels. Operating margins of cement companies had suffered in FY03 mainly due to falling cement prices. The company has done well to reduce its interest expenses. Lower interest rates have enabled almost all cement companies to pare down their interest costs by restructuring existing high cost debt at lower rates. Interest expenses have fallen by 27% in the June quarter.

ACC has also seen considerable improvement on the other income front. However, its effect on profits has been negated by the extraordinary expenses that the company has incurred in the June quarter. But for these expenses, bottomline growth would have been higher at 185%. Extraordinary expenses have been incurred to account for dimunition in value of investments (in subsidiaries and associates) and other assets.

The stock is trading at Rs 169, a P/E multiple of 16x its annualised 1QFY04 earnings. ACC has restructured its operations well enough to improve its operating efficiencies significantly. With improving realisations, the company is likely to see further improvement in profitability. In the long term, ACC being one of the largest cement producers in the country, is well placed to capitalize on the prospects of the cement industry, which look good considering the healthy demand from the housing and road infrastructure sectors.

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