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ACC: Bearing the brunt of slowdown
Oct 24, 2008

Performance summary
  • Topline grows by 7.5% YoY during 3QCY08 and by 3.8% YoY in 9mCY08 on the back of tepid growth in volumes and realisations.

  • Operating margins contract by 2.4% as costs continue to grow at a faster pace as compared to topline.

  • Net profits drop marginally despite higher other income, lower finance charges and depreciation costs.

  • If one excludes the extraordinary income (profit on sale of investments in subsidiaries), bottomline has grown marginally by 1.4% YoY growth in 3QCY08.



Financial performance snapshot

(Rs m) 3QCY07 3QCY08 Change 9mCY07 9mCY08 Change
Net sales 16,788 18,046 7.5% 52,216 54,221 3.8%
Expenditure 12,302 13,664 11.1% 37,215 41,044 10.3%
Operating profit (EBITDA) 4,486 4,382 -2.3% 15,001 13,177 -12.2%
EBITDA margin 26.7% 24.3%   28.7% 24.3%  
Other income 549 661 20.4% 1,519 1,835 20.8%
Interest 256 116 -54.7% 554 280 -49.5%
Depreciation 809 736 -9.0% 2,268 2,174 -4.2%
Profit before tax/(loss) 3,969 4,190 5.6% 13,698 12,559 -8.3%
Extraordinary item 39 -   116 489  
Tax 1,172 1,356 15.6% 3,963 3,923 -1.0%
Net profit 2,836 2,834 -0.1% 9,851 9,124 -7.4%
Net profit margin 16.9% 15.7%   18.9% 16.8%  
No of shares (m)       188 188  
Diluted EPS (Rs)*         72.2  
P/E (times)         5.8  
*trailing twelve month earnings

Note: The numbers are not strictly comparable to the corresponding period of 1HCY07, as the company has divested stake as well as invested in certain subsidiaries and associates.

What has driven performance in 3QCY08?
  • ACC continues to report slower growth in revenues from cement sales on account of sluggish demand for the commodity. The slackening of real estate and construction activity has led to lower offtake of volumes. While the company has not divulged its 3QCY08 volumes, our estimates are based on the difference in volumes of 9MCY08 and 1HCY08. The exercise reveals that the volume growth has been around 4% during the quarter. The same also highlights that the realisations have improved by nearly 4% YoY. While the movement in realisations have been volatile over the past three quarters, given the economic slowdown, for the full year CY08 we have estimated realisations to fall by nearly 1%.

    Cost break- up

    (% of sales) 3QCY07 3QCY08 9mCY07 9mCY08
    Consumption of raw materials 9.3% 7.8% 11.4% 10.6%
    Staff cost 5.5% 5.0% 4.9% 4.9%
    Power and fuel 19.4% 23.2% 16.8% 21.3%
    Outward freight 12.9% 13.1% 13.9% 13.7%
    Other expenditure 24.8% 25.5% 23.1% 24.0%
    Purchase of cement and other products 1.4% 1.1% 1.2% 1.3%

  • The rising costs of operation continue to exert pressure on operating margins of the company. The company has witnessed 2.4% YoY contraction in operating margins during 3QCY08. The increased power and fuel costs (as a percentage of sales) and other expenditure have also caused the damage. The overall operational cost has increased by 11% YoY during 3QCY08. The spurt in cost of operation can be attributed to the staggering rise in input cost such as fuel.

  • The net profits have displayed near stagnant growth. If one excludes extraordinary income (profit on sale of investments in subsidiaries) earned during the same quarter last year, net profits have grown by a marginal 1.3% YoY.


What to expect?
At the current price of Rs 420, the stock is trading at an EV/tonne of over Rs 2,200 based on our CY10 estimates, which makes it very attractive considering the replacement cost method. At the net level, the company has done better than our full year estimates. However, the topline growth has come in lower compared to our projections. The same has been the result of slower growth in volume on account of constraints in dispatches.

The industry is likely to maintain its growth momentum and continue growing volumes at around 8% to 10% in the medium to long term. The upcoming planned capacities are however, likely to exert pressure on the realisations, impacting margins. ACC will add another 8 MT of capacity to take its total capacity to little over 30 MTPA by CY10. Apart from the pressure on realisations, we are concerned about escalating costs, which need to be checked in order to support profitability.

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