ACC: Hold

Investors in the stock of ACC can hold on to their investments. The company’s aggressive expansion plans are expected to push up its total cement capacity to 30.4 million tonne per annum (mtpa) by 2010, from the current 22.4 mtpa.

Also on the anvil are the company’s 30 MW captive power plant at Bargarh, Orrisa (to be commissioned by mid-2009) and 25 MW power plant at Chanda, Maharashtra (2010).

With cement prices unlikely to witness any strong increase in the near term and ACC’s expansion plans likely to contribute only after two years, the company may post moderate earnings growth in the near term.

At the current market price of Rs 680, the stock trades at nine times its 2007-08 earnings.
Overview

ACC is a leading player in the Northern and Eastern cement markets and the largest cement player in the country with a capacity of 22.4 mtpa. Swiss cement major Holcim holds a 41 per cent stake in the company’s stake. After its acquisition by Holcim in 2005, the company saw a substantial improvement in performance, with the operating profit margins expanding from 28.7 per cent in 2005 to 33.6 per cent by 2007.

Holcim’s operational efficiencies and edge in technology has lent strong support to ACC over the years, with benefits expected in future as well.

ACC has also gradually exited its non-core businesses, with the sale of its refractory business in 2005, subsidiary ACC Nihon Castings Ltd in July 2007 and ACC Machinery Company in March 2008. The company’s ready mix concrete business was also hived off as a separate entity with effect from January 2008.

On the acquisition front, ACC has purchased 100 per cent equity stake in Lucky Minmat Private Ltd, Rajasthan, to augment the company’s limestone reserves. Further, the company has also taken up 14.3 equity stake in Shiva Cement to strengthen its market presence in Orissa.
Expansion Plans

ACC’s proposed addition of 8 million tonne per annum (mtpa) to its existing 22.4 mtpa by end-2010 is planned by way of augmenting grinding capacities at Madukkarai and New Wadi by 0.8 mtpa (total) and additions of 1.18 mtpa, 3 mtpa and 3 mtpa at three locations at Bargarh (Orissa) New Wadi (Karnataka) and Chanda (Maharashtra) respectively.

While the smaller additions to grinding capacity will contribute in 2008, the larger additions are expected to be commissioned by 2009 and 2010. The expected outlay for the Chanda green-field expansion is around Rs 1,450 crore.

The addition of significant capacities in the Western and Southern markets may help the company achieve a better regional balance in its sales mix. This may make it relatively less vulnerable to regional demand-supply disparities. For 2007-08, the northern markets reported a cement demand growth of 8.6 per cent and the Eastern markets 3 per cent.

Demand growth in the West at 14.6 per cent — was supported by an over 13 per cent growth in Maharashtra while growth in the South remained strong at 12 per cent.

The Northern and Western regions are expected to sustain strong growth with huge infrastructure and construction projects. ACC’s expansion in the relatively high demand pockets (West and South) may also strengthen its average realisations.
Soaring Operating expenses

Although ACC is a long standing player in the cement industry, input cost escalations have muted financial performance in recent times. For the quarter ending March 2008, ACC’s total expenses rose 15 per cent, led by power and fuel expenses rising by 25 per cent compared to the same period previous year.

ACC’s raw material cost, as a proportion of sales, also rose to13.4 per cent from 10.8 per cent over the above period . Further, the company has announced a price hold for two-three months after the Government’s request targeted at curtailing inflation.

Sales for quarter-ended March 2008 was up 12.6 per cent excluding the RMC business which was demerged this quarter.

The cumulative despatches between January-March 2008 rose 7.1 per cent to 5.29 million tonnes from 4.94 million tonnes in the corresponding previous period. However, strong volume growth did not translate into profit growth due to cost escalations.

Net profit after tax showed a marginal decline, after excluding profit from the disposal of ACC Machinery Company Ltd. Cost-pressures, flat realisation and sedate volume growth may contribute to moderate earnings growth from ACC over the next few quarters