• DECEMBER 31, 2003

ACC: Sensible acquisition...

Earlier this year, when Grasim acquired L&T’s cement division (Cemco), industry watchers were visibly thrilled as they felt that the move would bring in much needed consolidation for the industry. However, they also opined that the purpose of consolidation would have been better served had Grasim acquired few smaller companies rather than Cemco, which is the largest cement company in the country. What lends credence to the industry watchers’ remarks is the table given below.

Capacity control...
  Capacity (m tonnes)
Industry 138
Grasim+Cemco 31.0
ACC 17.1
Gujarat Ambuja 12.5
India Cements 9.0
Madras Cements 6.0
Century Textiles 5.0
Lafarge 4.5
Total 85.1
Total (% of industry) 62%

Indian cement industry is pretty consolidated at the top with about 7 players accounting for 62% of the industry capacity. However, what poses a problem is the remaining 38% of the capacity (53 m tonnes), which is shared by around 40 odd players. This leads us to believe that the average capacity of each of these players stands at a little above 1 m tonnes, a far cry from what an ideal cement capacity should be (2 MT). Therefore, given this industry situation where even the bigger players are finding the going tough, smaller players will either be forced to shut down or will be snapped up by bigger players.

ACC’s recent acquisition of the IDCOL’s (Industry Development Corporation Of Orissa Ltd) ailing cement plant IDCOL Cement Ltd (ICL), is therefore symptomatic of the trend that is likely to be witnessed in the times to come. Let us try and analyse the current deal.

ACC, the second largest cement manufacturer in the country, has bought over whole 86.8% stake of IDCOL at Rs 7.67 per share and has paid an additional Rs 56 m towards unsecured loans of IDCOL resulting in a total outgo Rs 1.8 bn. ICL has a total cement capacity of 1 m tonnes and is located in the state of Orissa.

Despite running at more than 80% of its capacity utilisation, ICL has been posting losses over the years (accumulated losses of around Rs 1.5 bn so far). ACC hopes to turn around the company in two years time and is also planning to install a 15 MW captive power plant so that the plant is self sufficient in energy. Besides, the plant is situated in Orissa, which surprisingly is a deficit market and has to ship around 1m tonne of cement from outside. The demand in the state grew at a healthy 18% in FY03. ACC is hoping to capitalize on these favorable factors and is planning to increase the clinkering capacity by around 35% and the cement capacity by around 1 m tonne.

Considering that a new plant of 1 m tonne needs funds to the tune of Rs 3 bn, ACC seems to have struck a good deal. Also, given the company’s track record in turning around a sick company (ACC successfully turned around Damodar Cement and Slag Ltd), it should be able to bring ICL back to profits and help it contribute positively to ACC’s profits.

Unlike company’s previous digressions, where it had put money into unrelated businesses such as International Ferrites and Bridgestone ACC, the current acquisition fits well into the company’s core business of manufacturing cement. ACC has also done industry a favour by not going in for a greenfield expansion. The greenfield expansion would have added to the existing surplus capacity in the country and would have further distorted the demand supply scenario.

ACC is currently trading at Rs 244 implying a P/E of 29x annualised 1HFY04 earnings. Although the company has a pan India presence and boasts of one of the largest distribution networks in the country, its high financial gearing and low operating margins remain a cause for concern. Unless there is an improvement in the same, the fundamentals of the company fail to justify the current level of high valuations.

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