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ACC: Can it deliver?
Sep 18, 2006

The Indian cement industry is second largest in the world after China and has grown at a CAGR of 8% in the last decade. Despite this impressive volume growth, cement companies have not benefited totally from this trend owing to the demand-supply mismatch in the past (supply grew at a faster pace than demand). Cement stocks have been in the limelight in the recent past owing to the fact that prices have risen sharply. Who will benefit from such a trend? In our view, ACC is well geared to capitalize on this opportunity. Company overview
Associated Cement Companies (ACC) is the second largest cement manufacturer in the country with a total capacity of 19.0 MT (11.8% of domestic capacity). With 14 plants and a 9,000 strong dealer network, ACC is one of the few companies to have a pan-Indian production presence. From a diversified player with interest in manufacturer of automotive tyres and float glass, the company has evolved into a core cement manufacturer over the last decade. Holcim, the European cement major along with Gujarat Ambuja, holds 34% stake in the company.

From non-core to Core: ACC now, is very different from what it was before ten years. The major difference is the fact that after burning fingers because of its venture into non-cement businesses, it has learnt that cement is what it is good at. ACC sold its refractory business to ICICI Venture Funds for Rs 2.6 bn. In 2001, ACC sold its stake in Floatglass India to the foreign partner Asahi Glass, Japan. Earlier, ACC had closed operations of its loss making Synthetic Ferric-oxide plant.

The turnaround strategy also revolved around improving its core business i.e. cement. ACC completed modernisation-cum-de-bottlenecking at its three plants i.e. Madikkarai, Chanda and Gagal during 2001. The fact that ACC’s plants now manufacture cement based on the dry-process has also helped the company reduce expenses considerably (wet-process is costlier than dry-process). The benefits of the modernization, expansion and de-bottlenecking activity are visible by robust growth in its bottomline 2001 onwards.

What numbers say? Net sales have grown at a CAGR 4% from FY97 to CY05 while operating profits have grown at a CAGR of 9% from FY97 to CY05. Though growth is lower, it has to be remembered that it was restructuring its operations. Nevertheless, at the operating level, benefits are palpable (raw material cost as a percentage of sales was 14% in CY05 as compared to 23.8% in FY97). Power costs did rise, but on an average, the company was able to maintain total power cost (including coal purchased) at approximately 22% of total operating expenses. To tackle with the problems arising due to grid power, enhance smooth functioning of plants and reduce costs, the company has been setting up captive power plants. Perhaps the major thrust has been on improving productivity. Employee costs have come down to 6.5% in CY05 from approximately 9% in FY97 (headcount has come down from 14,800 in FY97 to 9,100 levels in CY05).

Where to from here?
Recently, the company announced its capacity expansion plans to the tune of Rs 11 bn, out of which Rs 5 bn will go towards setting up 50 ready-mix units by 2010. ACC would also invest another Rs 6 billion over the next two years to expand capacity in plants in Bargah in Orissa and Sindri in Jharkhand. The projects at Lakheri for expansion of capacity and setting up 25 MW captive power plant will result in savings on power costs.

We expect ACC to significantly benefit from the favorable cement price scenario. Already, in the first half of the calendar year, operating margins has expanded by 950 basis points (9.5%), which resulted in doubling of net profit in the same period. But we have reservations with respect to current valuations of the stock. At enterprise value per tonne of over US$ 160, which is higher than global peers, we believe that risk-reward equation is skewed towards risks.

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