ACC: High prices, new capacity provide base for growth

Byyyp

Updated Mon, 12 Dec 2011 00:00:00 GMT

Holcim-controlled ACC, an all-India player, has benefited from strong cement price realisations, especially in the southern and western regions during the September 2011 quarter. This has enabled the company to report an 84.6% y-o-y growth in its consolidated net profit for the third quarter of CY11 (the company follows a calendar year for financial results), and also offset high input costs like coal.

In contrast, the company had reported a fall in its net profit in the first and second quarters of CY11, on a y-o-y basis due to higher costs. ACC's total cement capacity amounted to nearly 30 million tonnes at the end of CY10, boosted by additional capacity brought on stream late that year in Maharashtra and Karnataka. The benefit of this new capacity would also be reflected in the company's results over the next few quarters, say analysts.

ACC and fellow Holcim-controlled Ambuja Cements together are the leading players in the domestic cement industry. Ambuja Cements' capacity amounted to almost 25 million tonnes at the end of CY10. Nearest rival Grasim, via its subsidiary UltraTech, had a total capacity of nearly 52 million tonnes (including UAE-based Star Cement) at the end of March 2011. The total capacity of the domestic cement industry was estimated at 288 million tonnes at the end of FY11.

Also, with the monsoon season broadly over in most parts of the country (except the southern region), cement prices have started to rise in several regions, on expectations of a revival in construction activity. However, key user industries for cement like the real estate sector are facing a tough operating environment, given that there are no signs of easing in home finance rates.

The ACC stock hit a 52-week high last month and is currently trading marginally below that level.

BUSINESS

ACC posted cement sales volume of 21.3 million tonnes during CY10, marginally lower on a y-o-y basis. The company, via its subsidiary ACC Concrete, has a presence in the ready-mix concrete market which includes supply of concrete to construction sites. The company's cement division accounted for 93.4% of its CY10 consolidated net sales.

FINANCIALS

ACC's consolidated operating profit margin improved 130 basis points y-o-y to 13.3% in the September 2011 quarter, while net sales grew 31.5% to Rs 2,382.8 crore. Its cement realisations improved nearly 11% y-o-y on a per tonne basis, and helped offset higher input costs. As a result, ACC's consolidated net profit improved 84.6% y-o-y, in the quarter, boosted partly by low-base effect of previous year.

During the trailing four-quarters ended September 2011, ACC has shown better performance vis-a-vis other leading players. For instance, ACC's consolidated net sales grew nearly 16.1% y-o-y during this 12-month period while operating profit declined 7.3%. But in the case of Shree Cement, a leading player in the North, net sales grew 7.8% y-o-y during this period while operating profit fell 16.1%.

GROWTH DRIVERS & CONCERNS

Cement prices have shown signs of a pick-up. But key user industries like real estate are facing a slowdown. There is considerable uncertainty regarding implementation of fresh government-funded infrastructure projects. In addition, cost pressures remain a cause for concern for the sector despite some easing in prices of inputs like global coal. And that's largely due to the rupee's depreciation.

VALUATIONS

ACC trades at a consolidated P/E of 20.1 times on a trailing four-quarter basis. Rival UltraTech Cement trades at a standalone P/E of 19.4 times, while Shree Cement is at 39 times. The ACC stock does appear expensive in short-term, but could be considered on a long-term basis.