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ACC: Realisations aid bottomline
Oct 20, 2006

Performance summary
ACC reported enthusing results for the quarter ended September 2006. Strong volume growth during the quarter and significant improvement in realisations has helped the company deliver this performance. For the first half of the calendar year however, excluding extraordinary items in both the quarters, PBT was up by 1080 basis points (10.8%). Having said that, the last year financials include the erstwhile refractory division, which was divested this year in line with its strategy to exit from non-core operations.

Financial performance snapshot
(Rs m) 3QCY05 3QCY06 Change 9mCY05 9mCY06 Change
Net sales 10,671 13,916 30.4% 34,677 42,233 21.8%
Expenditure 9,031 10,202 13.0% 28,556 30,530 6.9%
Operating profit (EBITDA) 1,640 3,714 126.5% 6,121 11,703 91.2%
EBITDA margin 15.4% 26.7%   17.7% 27.7% 57.0%
Other income 270 195 -27.8% 824 694 -15.7%
Interest 211 144 -31.6% 656 496 -24.4%
Depreciation 562 610 8.4% 1,691 1,821 7.7%
Profit before tax/(loss) 1,136 3,155 177.6% 4,598 10,180 121.4%
Extraordinary items 1,730 - - 1,889 1,419 -24.9%
Tax 623 905 45.2% 941 2,880 206.0%
Net profit 2,243 2,250 0.3% 5,546 8,720 57.2%
Net profit margin 21.0% 16.2%   16.0% 20.6%  
No of shares (m)       187.3 187.3  
Diluted EPS (Rs)*         43.4  
P/E (times)         22.7  
*trailing twelve month earnings
Current quarter ended September 30, 2006 figures are not comparable with the previous quarter figures to the extent that Tarmac (India) Pvt Ltd is merged with the Company with effect from January 01, 2006.

What is the company’s business?
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.

What has driven performance in 3QCY06?
Realizations drive topline growth: For 3QCY07 revenues grew by 30.4% YoY. The company has strong presence in western markets where prices have increased by 34% YoY. Consolidated cement volume sales was higher by 8.4% YoY in 3QCY06, which was a tad lower than the industry growth rate. Moreover, the turnaround strategy also revolved around improving its core business i.e. cement. It has to be remembered that the company divested its refractory division in the first quarter of the calendar year. Excluding this and other ancillary revenues stream, the core operations of cement and RMC grew by 47% YoY in revenue terms in 3QCY06, which is commendable. Given the fact that cement prices are strong, we expect ACC to post significant margin expansion in the near-term.

Margins palpable but need to lower input costs: As mentioned above, operating profit has increased by 126% YoY due to better realisations. The company continued to face pressure on most of the operating heads, as is evident form the table below. The raw material costs, on a per tonne basis, were marginally lower, but the overall costs grew by 15% YoY (per tonne basis). Though the company managed to cut raw materials and staff costs, higher coal and petroleum products prices did have a negative impact on total costs during the quarter.

Cost break up (% of sales) 3QCY05 3QCY06
Increase/Decrease in stock 1.4% 1.8%
Consumption of raw materials 17.2% 11.5%
Staff cost 7.6% 5.1%
Power and fuel 20.1% 16.1%
Outward freight 15.5% 14.3%
Other expenditure 21.8% 22.2%
Excise duty 2.1% 1.1%
Purchase of cement and other products 0.2% 1.1%
Total expenses 83.1% 73.3%

Extraordinary effect on net profit: While it may seem that the net profit growth was flat in 3QCY06, in the third quarter last year, the company had a profit from the sale of its refractory business. If one were to exclude the same, the actual growth in net profit is higher at 338% YoY.

What to expect?
At the current price of Rs 985, the stock is trading at a price to earnings multiple of 22.7 times trailing twelve month earnings. In the medium term, cement realisations will continue to be on higher side, as the majority of the capacity additions announced by the players will start flowing in 2008. Nevertheless, we have reservations with respect to current valuations of the stock. At the current level, we believe growth has already been factored and the risk-reward ratio is skewed towards risk.

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