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ACC: Business as usual… - Views on News from Equitymaster
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ACC: Business as usual…
Oct 18, 2007

Performance Summary
  • Higher volumes (increased by 10% YoY) and improved realisations (increased 8% YoY) continue to drive the topline of the company, enabling it to grow by 22% YoY during the quarter.

  • Operating margins have remained stable.

  • The net profit has expanded by 30% YoY during the quarter as compared to the same period last year on the back of favourable pricing scenario and fall in interest costs.

(Rs m) 3QCY06 3QCY07 Change 9mth CY06 9mth CY07 Change
Net sales 13,778 16,788 21.8% 41,849 52,216 24.8%
Expenditure 10,132 12,302 21.4% 30,289 37,215 22.9%
Operating profit (EBITDA) 3,646 4,486 23.0% 11,561 15,001 29.8%
EBITDA margin 26.5% 26.7%   27.6% 28.7%  
Other income 225 284 26.3% 721 851 18.1%
Interest 138 (9)   479 9  
Depreciation 593 707 19.3% 1,772 1,962 10.7%
Profit before tax/(loss) 3,140 4,072 29.7% 10,031 13,882 38.4%
Extraordinary items 1 39   1,558 239  
Tax 893 1,186 32.8% 2,854 4,046 41.8%
Net profit 2,248 2,924 30.1% 8,735 10,074 15.3%
Net profit margin 16.3% 17.4%   20.9% 19.3%  
No of shares (m)       187 187  
Diluted EPS (Rs)*         73.0  
P/E (times)         14.4  
*trailing twelve month earnings

What is the company’s business?
Associated Cement Companies (ACC), India's foremost manufacturer of cement and concrete, with a total capacity of approximately 20 MT (12% 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 43% stake in the company.

What has driven performance in 3QCY07?
The story continues… Despite being a slack season, demand for the commodity did not drop and prices also remained firm during the quarter. Riding on the strong housing and construction boom being witnessed in the country and the infrastructure activities taking shape, ACC reported a strong topline growth of 22% YoY for the quarter ended September 2007. This growth came on the back of a 10% YoY increase in volume sales and improved realisations (grew by 11% YoY).

Cost pressure continues: The company continued to face pressure on most of the operating heads. Though it managed to cut raw material costs, higher coal and petroleum product prices did have a negative impact on total costs during the quarter. The EBITDA margins have expanded marginally (0.2%) during the quarter as compared to the same period last year on account of improved realisations. Had not the company witnessed favourable pricing scenario, margins would have contracted on account of inflationary pressures. Costs as a percentage of sales have reduced, however, on cost per tonne basis, they have increased by almost 6% YoY during 3QCY07, and have grown by 13% YoY for the nine months ended CY07.

Cost break-up
( % of sales) 3QCY06 3QCY07 9mth CY06 9mth CY07
Consumption of raw materials 13.3% 9.5% 12.7% 11.3%
Staff cost 5.1% 5.8% 5.1% 5.2%
Power and fuel 16.2% 19.4% 16.9% 16.8%
Outward freight 14.1% 12.9% 14.3% 13.9%
Other expenditure 22.7% 21.7% 21.0% 20.7%
Excise duty 1.1% 2.5% 1.4% 2.1%
Purchase of cement and other products 1.0% 1.4% 0.9% 1.2%
Total expenses 73.5% 73.3% 72.4% 71.3%

Lower interest cushion & other income effect: The bottomline growth of 30% YoY outpaced topline growth on account of higher other income and lower finance charges. Lower interest charges have enabled the company to improve net margins (expanded by 1.1% during 3QCY07). Had not the other income witnessed 26% YoY growth during third quarter CY07, the net margins would have been tad lower at 15.7%. During the quarter, the company has sold its entire investment in its wholly owned subsidiary, ACC Nihon castings Ltd, which has resulted in profit of Rs 38.9 m.

What to expect?
The current growth is more a function of improved realisations and this scenario is likely to reverse once the planned capacities come on stream. To cash in on the favorable pricing scenario, cement producers have lined up capacity expansion plans, which will start flowing in from 2008. Thus, in near to medium term, cement realisations will continue to be on the higher side. However, at the current level, we believe much of growth has already been factored in. Thus, while the near term scenario is favourable, from a long-term standpoint, we advise investors to practice caution.

Going forward, the benefits of being associated with Holcim would be visible in terms of improvement in the areas such as logistics, product portfolio management etc. ACC has outlined capex to the tune of Rs 40 bn to expand capacity by almost 7.5 MT, set up ready mix units and captive power plants. At the current price of Rs 1,052, the stock is trading at an expensive valuation of about US$ 165 on the enterprise value per tonne (EV/tonne) basis as per our CY09 estimates.

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