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ACC: Slack performance
Oct 14, 2005

Performance summary
ACC, one of the largest cement manufacturers in the country, has declared its September quarter results for FY06. The company has delivered a disappointing performance for the quarter with profits being substantially lower than the corresponding quarter of last year. This is despite a strong double-digit topline growth, which failed to materialise into profits owing to severe pressure at the operating level. However, the numbers declared reflect a 159% YoY growth in profits owing to an extraordinary effect. The poor performance of 2QFY06 has overshadowed the robust performance of the previous quarter (1QFY06), thus affecting the company’s adjusted 1HFY06 performance.

(Rs m) 2QFY05 2QFY06 Change 1HFY05 1HFY06 Change
Net Sales 8,853 10,050 13.5% 18,332 21,332 16.4%
Expenditure 7,354 8,649 17.6% 14,959 17,799 19.0%
Operating Profit (EBDITA) 1,499 1,401 -6.6% 3,374 3,534 4.7%
EBITDA margin (%) 16.9% 13.9%   18.4% 16.6%  
Other income 337 253 -25.0% 226 668 195.6%
Interest 197 200 1.6% 405 419 3.3%
Depreciation 444 487 9.6% 883 967 9.5%
Profit before tax 1,195 967 -19.1% 2,311 2,816 21.9%
Extraordinary item - 1,803   - 1,803  
Tax 409 735 79.7% 716 1,191 66.4%
Profit after Tax/(Loss) 786 2,034 158.9% 1,595 3,428 114.9%
Net profit margin (%) 8.9% 20.2%   8.7% 16.1%  
No. of Shares (m) 179 184   179 184  
Diluted earnings per share 13.2 33.2   13.4 28.0  
Price to earnings ratio (x)   13.3     15.8  

What is the company’s business?
Associated Cement Companies (ACC) is the oldest and the second largest cement manufacturer in the country. The company has a total consolidated capacity in the region of 17.6 MT (million tonnes) and commands a near 12% industry capacity share. With 14 plants and a 9,000 strong dealer network, ACC is one of the few companies to have a pan-Indian presence. It is particularly strong in the northern and eastern regions with approximately 18% and 19% of the market share respectively.

What has driven performance in 2QFY06?
Improved realisations aid topline: ACC reported a topline growth of over 14% YoY for the quarter ended September 2005. While volume sales were affected during the quarter owing to floods and heavy rains in many parts of the country, the company managed a 13% YoY growth in revenues from its business, much of which has seemingly come about on the back of improved realisations as cement despatches took a hit. Further, the company’s ready mix concrete (RMC) business also grew by 35% YoY. However, it must be noted that unlike cement, which contributes to over 85% of ACC’s revenues, the RMC business has a meager 6% share.

Cost break-up (% of net sales)
  2QFY05 2QFY06 1HFY05 1HFY06
Inc/Dec in stock in trade -3.9% -0.3% -4.4% -1.5%
Raw material consumed 15.7% 15.0% 15.6% 15.1%
Staff costs 6.0% 7.0% 5.7% 5.8%
Power & Fuel 21.3% 19.9% 21.7% 19.0%
Freight & Forwarding 13.4% 15.5% 13.4% 15.5%
Excise (net of recovered) 0.5% 1.2% 0.6% 1.6%
Purchase of cement 7.7% 6.3% 6.7% 7.3%
Other expenditure 22.4% 21.4% 22.3% 20.7%
Total expenses 83.1% 86.1% 81.6% 83.4%

Higher input costs dent margins: 2QFY06 has witnessed a fall of 300 basis points for the company on the operating margins front. Increase in cost of inputs such as coal and petroleum products and increase in royalty of limestone resulted in pressure on the company’s cost of production. Further, a 32% YoY rise in staff costs during the quarter aided the erosion of benefits arising from a robust topline growth. Most of the other operating heads remained largely favourable as can be seen in the table above. Nonetheless, this could not prevent from reporting a 7% YoY fall in operating profits. For the half year ending 1HFY06 too, the operational performance picture of the company is not very encouraging.

One time income boosts bottomline: While the other financial expenses of the company i.e. interest costs and depreciation were reasonable, a 25% fall in the other income component and pressure at the operating level put pressure on the bottomline. However, the same does not get reflected in the PAT figure for 2QFY06 as the company divested its refractory business during the quarter and profit on sale of this amounting to Rs 1.7 bn has been recognised during the quarter, which helped prop the bottomline. Without this extra-ordinary effect, the profit of the company has actually declined sharply by 71% YoY. Further, considering the same, the 1HFY06 numbers would actually stand revised to a mere 2% YoY growth, but for the profit from sale of the company’s undertaking.

What to expect?
At Rs 442, the stock is trading at a price to earnings multiple of 11.8 times our estimated FY08 earnings and EV/ton of about US$ 100. Notwithstanding the one-off effect, the company’s performance has been rather disappointing and we would have to revise our full year estimates downwards. Further, considering the current valuations of the stock, we continue to believe that the stock does not leave any margin of safety for an investor. Investors must note here that Gujarat Ambuja remains our preferred play in the sector.

However, going forward, we remain optimistic on the cement sector as a whole, which is in the midst of surging demand led by the booming housing industry and is also being aided by the growth in infrastructure related activities. Coupled with the lack of any significant greenfield cement capacity addition in the medium-term, we expect the pricing environment to remain favourable for cement manufacturers.

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