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ACC: Research meet extracts
Nov 25, 2008

We recently met up with ACC to get a first hand understanding of the various developments taking place within the company and the cement sector. Here are the key takeaways from the same.

Industry overview: In the first ten months of the calendar year CY08, the cement industry has grown at the rate of little over 7% (close to 8%) which has been lower than expectations. The financial turmoil has resulted in a global economic slowdown and the same has impacted growth of the domestic economy. Given that the growth of cement industry is linked to India’s GDP growth, a slowdown in the same has resulted in slower growth of the industry. Going forward, the industry is likely to witness muted growth of around 7% to 8% on account of slowdown in construction activity.

Demand-supply scenario & pricing environment: The industry is likely to face a situation of excess supply as the announced capacities become operational (these capacities have already started coming on stream). We believe that the cement prices will be pressurised once the planned capacities come on stream exerting downward pressure on realizations, which is also the opinion of ACC. During the period Jan-Oct CY08, the company in particular and the industry (on an average) witnessed 6% YoY growth in realisations.

Expansion plans: Enumerated below are the expansion plans of the cement industry and ACC in particular.

  • ACC: In the recent past, demand had outstripped supply. To cater to the growing demand for the commodity and in order to maintain market share of around 12%, the company has outlined huge expansion plans. It has planned to increase its capacity by nearly 8 MTPA to 30.4 MTPA by CY10. For the same the company is likely to spend around Rs 15 bn per annum over the next two to three years.

  • Industry: With the growth in the sector and the waning demand supply gap, cement producers have lined up capacity expansion plans either through the brownfield or greenfield expansion route. The fresh capacities announced till date will add 60 to 70 MT to the existing capacity (nearly 200 MT), and are expected to go on stream by CY10. Having said that, the chances of delays cannot be ignored as there could be delays from the equipment suppliers (order book is full). Further, delays could also take place due to the cancellation or rescheduling of expansion plans by few players owing to problems of availability of credit. Considering the outlined expansion plans during the XI plan period including captive power plants, the total investment to be made by the industry is likely to be a little over Rs 520 bn (Source: CMA – Cement Manufacturers’ Association).

Funding: ACC intends to fund its huge expansion plans through internal accruals as it has sufficient reserves and cash balance. However, on account of falling realisations, the company’s cash flow could get impacted. Moreover, escalating cost of operation has resulted in increased cash outflows, which could get magnified further if there are any delays. Thus, considering these factors, the company might raise funds, if need be, to fund its expansion plans that includes capacity addition and captive power plants to ensure smooth functioning of the plants.

Currently, the company has approximately Rs 5 bn debt on its books and all are rupee loans. Even if it does raise funds, the company expects its debt to equity ratio to stand below 1 (approximately 0.5). However, we do not expect the company to further leverage its balance sheet.

ACC’s performance in 9mCY08: The company witnessed a tepid 2% to 3% YoY growth in volumes during 9mCY08 due to the problems that it faced on the production and dispatches front, while realisations were up by 6% YoY. The performance of the other players within the industry, especially those who compete with ACC (in respective regions) was far better. The trend in volumes growth clocked by the industry and other players means that the company is losing its market share in some regions. This has also resulted in lower volumes offtake.

What to expect?

Even though it is debated time and again that the domestic economy is strong and is unlikely to face the impact of slowing down of major economies across the globe, the fact remains that India is no more insulated to global trends. The slowdown may not have severe impact on the growth of the economy immediately but the investments required to fund the huge capex plans, necessary to give a further fillip to the growth of the economy, are getting impacted. This has resulted in the economy growing at a slower rate than expected, in turn impacting the current robust growth of the cement sector. The slowdown in the near to medium term will impact the company’s margins.

However, the prospects of the cement sector from the long term standpoint remain intact. If the Indian policy makers have to put the country on a high GDP growth trajectory, sizeable investments in infrastructure will have to be made, thus boosting the demand for cement. We shall soon update our research report on the stock.

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