ACC is a tightly run ship for sure. It is therefore indeed a pity that this industry behemoth could only celebrate its platinum jubilee in muted style. A dividend of Rs 30.5 per share against Rs 23 per share previously was all that it could manage. It wasn't the best of years for the company in terms of sales and profits, thanks to the negative fallout of the severe mismatch in the capacities created at the all India level by the cement industry on the one hand, and the countrywide demand for cement on the other. The company registered a marginal drop in standalone net sales including other income to Rs 80.7 bn (Rs 82.6 bn previously), but which resulted in a sharp decline in the bottom-line. With both manufacturing expenses and personnel expenses rocketing upwards, the profit before interest, depreciation and taxes fell 30% to Rs 19.1 bn.
Though in produced the same quantum of cement in 2010 as it did in the preceding year, it sold a marginally less 20.9 m tonnes against 21.2 m tonnes previously. Along with a drop in volume sales, it also suffered a marginal drop in gross realisations per tonne to Rs 3,585 from Rs 3,680 previously. At end December, 2010 it had a rated capacity to manufacture 27 m tonnes of cement per annum, and with the new capacities that have come on stream in 2011 that figure will go up to 30 m tonnes. As one can see the company seems to revel in creating capacity far in excess of its ability to deliver the finished product in the market place. And unutilised capacities add to production costs in terms of depreciation, maintenance, interest costs and whatever else.
But as I said earlier it is also a tightly run ship. At year end 2010 and in the preceding year end, its net current assets were in negative territory. That is to say it owed more money to its day to day working capital creditors than was due from working capital debtors. That is the exact opposite of text book corporate financing norms. Normally, companies like to put their best foot forward in their only public disclosure each year as negative current assets in normal circumstances imply that the company is suffering from a shortage of working capital, and is on the sick bed at that. ACC is not in that league, and not by a mile at that. And if ACC has chosen to present such a picture at year end it could imply that it was in an even crappier working capital situation during the course of the year.
Using its clout in the market to the hilt
Such a trigger happy game plan can only be crafted by a company which is an industry leader and has a tight hold over its creditors on the one hand, and sells cash down on the other. And ACC virtually sells cash down for sure. The plus point in fashioning such a complex funds management scenario is that the company gets to save on working capital costs - interest costs which are paid to the lenders of short term monies which in India cost more than long term borrowings. The total interest paid by ACC during 2010 on all counts and debited to P&L (profit and loss) account was a miniscule Rs 568 m in spite of the humungous size of its operations (the capitalised interest being Rs 366 m). For example, the company has also added Rs 23.5 bn worth of fixed assets in the last two years, and this outlay has very admirably enough been financed in both the years by funds generated from operations. And the cement industry is capital intensive to the core. The gross block, excluding capital work in progress, toted up to Rs 81 bn at year end. The installed capacity rose to 27 m tonnes from 26 m tonnes previously. The borrowings at year end amounted to Rs 5.2 bn. Its funds flow is an example on how to make ends meet with what you have – and it had enough spare cash on hand to hold debt securities of the value of Rs 13.2 bn.
The vagaries of the cement market
The sorry part of it all is that the performance results of cement companies are largely dependent on the vagaries of the demand supply equation. The two opposites of this equation never even out for sure. There is either an excess supply or there is an excess demand. The principal reason being that additional capacities are invariably created when the industry sees a shortage looming ahead and commissioning a new plant, or for that matter the commissioning of an expansion scheme takes time, and an insufferably large capacity gets added on. The only plus point here is that importing cement is never an alternative as our production costs are very competitive.
Besides expanding capacity, the company is also slowly nibbling away at two bit cement units, concrete units, coal units or even accessories of cement units, which are bought outright or conceived through the joint venture concept. It has six subsidiaries, four joint ventures, and two associate companies. It also has a trade investment in a cement unit styled Shiva Cement Ltd. The subsidiaries are almost all completely owned by the parent, while its share in its four JVs is very strategically penned at 49%. It has a 45% stake in one associate, Asian Concretes and Cements, and a 40% stake in the other associate, Alcon Cement Company. Why it has chosen to 'limit' its stake in its four JVs - all of whom are exploring for coal in Madhya Pradesh, and have similar names - at 49%, is not easily explainable given the size and standing of ACC.
These four joint ventures have been loaded on to its subsidiary, ACC Mineral Resources Ltd. But they are yet to feature in the investment schedule of ACC Minerals. Besides, this wholly owned subsidiary with a paid up capital of a mere Rs 50 m will have to ante up a lot more capital if ACC wants to finance the business of coal exploration. Further, some of the titbit subsidiaries are a quirky lot. The average acquisition price of Lucky Minmat Ltd (face value per share Rs 100) was at Rs 1,172 per share for a total consideration of Rs 381 m. The shares of National Limestone Company (face value per share Rs 100) were acquired at a phenomenal price of Rs 18,775 per share at a total cost of Rs 162 m. The sums paid appear to be rather hefty given their individual contribution to the company's branding. But who cares anyway.
The ready mix concrete subsidiary
Its biggest outlay is in its subsidiary, ACC Concrete, in which it has invested Rs 1 bn in equity and another Rs 1 bn in cumulative redeemable preference shares. From the parent company's point of view, issuing the latter security was well thought out, as it will get all its dues even if it is delayed. But if seen from the subsidiary company's view point, it was in poor taste, but the latter apparently had little say in the matter. At the end of 2010, it had also availed of a 'soft' loan from the parent amounting to Rs 730 m. But in the fourth year of its existence it is still a no-brainer trying to eke out its place under the sun. (With the cost of inputs accelerating at a faster pace than the meagre increase in the unit sales realisation, it is tough to make ends meet). On a gross income of Rs 6.1 bn, it reported a pre-tax loss of Rs 291 m. In the preceding year the company had rolled out figures of Rs 5.1 bn and a negative profit of Rs 469 m respectively. This company is in the business of ready mix concrete, also known by its acronym RMX. It currently operates 48 plants, up from 44 in the preceding year. But it also buys RMX for resale. Its accumulated losses at year end amounted to Rs 1.72 bn. But still the company thought nothing of paying its Swiss CEO a salary fit for a King.
Unlike the parent, it has to also give large dollops of credit to affect sales. The clientele is different quite obviously. It is not the credit that it has to extend to generate sales that makes it interesting. It is the manner in which it acquires the materials to generate the sales that is illuminating. It purchased 'finished/unfinished' goods worth Rs 752 m from the holding company, Holcim, and a further Rs 523 m of similar materials from a group company, Ambuja Cement. That makes for a total of Rs 1.3 bn. Where these two purchase items appear in the 'manufacturing and distribution expenses' schedule is not quite decipherable. Separately, it also purchased ready mix concrete worth Rs 475 m. It consumed raw materials worth Rs 3.9 bn to crank out the finished product. Concurrently it also paid out monies on account of training/technical knowhow/market survey/management fees to group companies of Holcim. Some of the heads of account under which these payments are expensed are a bit difficult to digest. But let that be.
In line with the policy of the parent, ACC Concrete too is creating additional capacity far in excess of its capacity to deliver. In 2010, the installed capacity of ready mix concrete increased to 5 m cubic meters from 4.2 m cubic meters previously. However, the production of ready mix concrete increased only marginally to 2 m cubic meters (1.7 m cubic meters previously). The question that also arises is as to why the company is resorting to buying cement concrete of various hues running into over a billion bucks when the company has so much of idle capacity on hand? It just does not add up. How exactly is it supposed to make a decent living in such a whacko scenario?
The other subsidiaries that it boasts of are mere pin pricks in the overall scheme of things and are likely to remain so in the years to come unless the parent decides to do some drastic restructuring.
Disclosure: I hold 375 shares this company (ACC Limited).
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.