ACC, the second largest cement manufacturer in the country has reported a topline growth of 12% YoY for the September quarter. The net profit however, has increased by 445% on the back of a reversal of income tax provision and a robust increase in the other income. The operating margins of the company have however declined by 100 basis points.
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For 2QFY04, the volumes have registered an increase of 10%, pointing to the fact that the increase in realisations has been marginal, if any. Going forward, we expect the volumes to grow at a sharper rate as the growth during 2QFY04 was affected mainly on account of prolonged monsoons, which saw a decline in construction activity. The industry is expected to grow at a rate of 8% in the next 2-3 years and ACC being one of major players in the industry is well placed to capitalize on this opportunity. The realisations also are likely to improve since the demand supply parity, which had been affecting realisations is on the wane on account of slow down in the pace of capacity addition.
For 1HFY04, the growth in volumes of the company stood at around 8% as compared to a growth rate of 4.3% achieved by the industry.
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On account of an increase in the cost of raw materials, the total expenditure of the company has grown at a faster clip than the topline and as a result the operating margins of the company have suffered a decline of nearly 100 basis points in 2QFY04. However, for 1HFY04, the operating margins of the company have increased by around 80 basis points mainly on account of rise in volumes and a moderate increase in realisations. The company suffers from low operating margins and there is also a limited scope for them to improve on account of the old age of its plants. Although the company is taking efforts to improve the same, we expect the operating margins to stabilize at around the 15% levels.
The interest as well as depreciation cost for the company has also increased as a result of commissioning of captive power plants at Tikaria, Madukkarai and Chanda and also augmentation of Tikaria grinding capacity and this has put further pressure on the bottomline of the company.
Had it not been for the reversal of income tax provision and a 54% increase in the other income of the company, the bottomline of the company would have actually seen a decline.
The stock is currently trading at Rs 199, implying a P/E multiple of 30.5x of 2QFY04 earnings. Although the industry growth rate that was affected in 1HFY04 due to transport strike and prolonged monsoon is expected to witness a sharp rise, the low operating margins of the company remain a cause for concern. Unless we see a substantial improvement in the same, the fundamentals of the company are not good enough to justify such high valuations.
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