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ACC: Chugging on the right path - Outside View

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ACC: Chugging on the right path
May 3, 2010

ACC represents a study of bewildering contrasts --both in the past and the present. Easily the oldest running large cement company in the country (it will shortly celebrate its platinum jubilee)---and an amalgam of many cement units to boot and hence its name ---the very fact that it continues to prosper today in direct competition to more fleet footed newcomers is a tribute to the dexterity of the management and perhaps even the benevolence of the almighty.. In the years prior to delicensing and price controls to boot, the company's share was among the speculators' favourite counters for decades at the Bombay Stock Exchange, at a time when all it had to show for this frenzied interest was obsolete cement plants and an insipid management, but with a fancy board of directors headed by the eminent jurist, the late Nani Palkhivala-whose sharp mind and delectful play with words did no good to the insipid bottomline.

Cut to the present and the situation is just the opposite --it has ceased to be a speculative counter but at the same time the company can today challenge any of the competition in what it delivers in the marketplace.

The latest report for the year 2009 is a testimony of what the company now is. Extremely low gearing for one and the expansion of its mfg capacity (close to Rs 10 bn in 2009) funded by internally generated resources for another. Its many mfg units which are flogged at close to their installed capacity and captive power generation, which takes care of the bulk of its power requirements.

Captive power generation is an unnecessary capex, but in the Indian context, there is simply no other way to go. In addition, the directors inform that the company is cutting costs every which way including wind farm energy and resorting to the usage of alternate fuels from industrial wastes. It may be noted that by far its single biggest item of revenue expenditure is on power and fuel. Transportation costs is the other big bugbear of this industry

The company's ability to sell all that it produces, which implies excellent co-ordination and the fact that it sells cash down shows the clout that its brand represents---this also implies savings on working capital costs .Where it truly squeezes out the maximum in funds management is in its ability to keep at bay working capital creditors and simultaneously stretching its working capital payables--leading to an unfortunate negative mismatch in the current assets to current liabilities ratio--atleast this is what the year-end figures in 2009 have to show. Not exactly the text book prescription of the best way to manage one's working capital, but when you are the market leader you can also cut corners and take advantage of this position.

Where it did not quite shape up was in its inability to make any gains from rolling over its treasury surpluses. The consolidated entity has during 2009 bought over Rs 48 bn in various mutual funds and sold Rs 40 bn of it but apparently it has not turned any profit from this fancy footwork. Atleast the other income column is devoid of any income accruing from this activity.

It apparently pays its direct and indirect taxes very diligently. The amounts under dispute is miniscule given the scale of operations of ACC.

The EPS of Rs 85 per share on Rs 10 face value for the year 2009 is currently discounted at a P/E of 11.2 times based on the closing price of Rs 964 on Mar 17, 2010. Cement cos per-se get a very low P/E multiple probably becuase of its mfg tag and the low inventory / turnover ratio, which is the norm for this industry.Among the large cement units, ACC logs the third highest P/E --after Gujarat Ambuja and Ultra Tech Cement, as per the data culled from Capital Market magazine

The current expansion process is expected to increase its installed capacity to 30.5 m tonnes per annum by end 2010 from 26 m tonnes at end 2009. Given the favourable outlook for the cement industry (the company is paying a dividend of Rs 23 per share or 230% for 2009) and the gross mismatch between its present paid up equity of Rs 1.9 bn and accumulated reserves of Rs 58 bn-- mostly in the form of free reserves --the company can be said to be a ripe bonus candidate -- management surmising in a similar manner that is.

Disclosure: Please note that I am a shareholder of this company

This column "Cool Hand Luke" is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.

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