ACC, the largest cement producer in the country, has announced disappointing September quarter results. The company has reported a 70% fall in its bottomline while the topline has grown by 8% on a YoY basis. Operating margins of the company have dropped drastically by nearly 700 basis points to 8%.
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ACC's cement volumes have grown by an encouraging 28% but a 13% fall in realisations have meant that the topline growth was restricted to 8%. ACC has one of the highest sensitivity to variation in cement prices. Volumes have also been higher on account of poor monsoons which allowed construction work to proceed as usual. In the current quarter also volumes are expected to be robust. Realisations too have shown signs of improvement, especially in the western region.
ACC's operating expenses have gone up considerably on account of higher volumes. Lower realisations have however, restricted the topline growth. They have also taken a toll on the operating margins. Apart from the regular operating expenses, other expenses have gone up by a considerable 25%. Operating profits have fallen by 43% in the September quarter on a YoY basis. Operating margins have fallen to their FY00 levels of nearly 8%. Please remember that ACC's operating margins had improved to 15% in FY02.
Due to lower operating margins, ACC has reported a 70% fall in its net profits. It must be pointed out that in the previous quarter, the company had incurred extraordinary expenses to the tune of Rs 250 m on account of dimunition of value of investments and write down in value of assets. If these extarordinary expenses are not taken in to consideration, then net profits have actually fallen by 88%. A 36% fall in interest expenses has however ensured that the net profit fall has been restricted.
At Rs 133 the stock is trading at a P/E of 111x its annualised 2QFY03 earnings. Bottomline performance of most of the cement majors has been poor on account of low cement prices. But ACC seems to have been hit harder by this, as its bottomline and operating margins have shrunk at a faster clip than its peers. Growth in topline is likely to be ensured due to robust volumes. Cement prices are expected to improve in the current quarter but may not stabilise at a higher level till the the beginning of the next financial year. Quarterly valuations being an aberration investors may invest in pure cement companies, that are likely to witness an upturn once cement prices start strengthening.
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