May 02 , 2001

ACC

BUY
Market price : Rs 149.80
Market Cap : Rs256bn
52week H/L : 199.8/83.5
Average Vol : 3.8mn

After incurring a loss of Rs588mn during FY00, ACC is back in black by registering a profit of Rs475mn during FY01. The excellent results posted by the company during FY01 have beaten the analysts expectations by around 30%. We are excited about the future prospects of the company and the industry.

The company is the largest producer of Cement along with L&T in the industry. With the commissioning of the Wadi unit, the company’s production capacity has moved to 15.3mn tons. ACC has a network of plants covering all regions in the country.

Despite the fact that the cement industry growth declined by 1%, the company sales spurted by 3% in volumes to 11mn tons and 10% in value to Rs29.59bn. The company sells cement across the country and is a dominant player in the North and the Eastern regions.

The production of Cement for the year improved by 1.7% to 10.21mn tons while the dispatches increased by 3% to 11mn tons (10.24 excluding traded cement).

Cement prices have been on the rise since December 2000 when most of the cement majors like Larsen & Toubro, Gujarat Ambuja Cements, Grasim and ACC raised the prices to around Rs180-185 (up by Rs50/-) per 50Kg bag. Prices are expected to be maintained at these levels with some weakening expected during the monsoons. The increase in cement prices along with the increase in the volumes will result in a healthy topline and bottomline growth.

ACC has drastically cut down its operational cost to improve its bottomline. Operating margins during FY01 improved to 11% from just 6% last year. It has reduced its manpower by 4000 employees (Rs140mn) and intends to trim the workforce by a thousand more in a couple of years. ACC’s captive thermal power plants at Jamul and Kymore helped in reducing the power costs by Rs420mn. The cost of fuel came down by Rs70mn. The company has also made efforts towards reducing its distribution cost. Being the oldest player in the industry, ACC has a legacy of wet process plants that the company has modernized over the years and has turned most of its plants to dry process plants. This will result in significant cost savings of fuel and power.

Margins are likely to improve due to higher realizations and cost-cutting initiatives taken by the company. Last year the cement prices were lower than the cost of production for most part of the year while the scene is different this year as prices have been much higher than the cost of production.

ACC is nearly towards the end of its Capex cycle. Post completion of Wadi cement unit, the company doesn’t have any major capex on hand. Hence, the higher free cash flows that it gets every year will be used to deleverage and will result in reduced interest costs.

The industry has moved into a consolidating stage where smaller players who are currently making losses are likely to sell off their capacities. This will reduce the number of players from the existing 55 to 10-15 in two year’s time, with 4-5 major domestic players, few MNCs and small players to stay. The reduction in competition will improve the pricing power of the players and will help raising the industry ROCE.

The decision to sell off its non-core businesses will enhance the company’s focus on Cement.

The slowdown in the cement industry and the capacities coming up during FY02 is likely to result in an oversupply situation in the industry. However, if the country has a normal monsoon and the infrastructure projects in the pipeline take off, we can expect a revival in demand to take place from the second half of the current year.

The stock is trading at 12.5x FY02P EPS. With the upturn in the cement cycle and the ongoing consolidation process in the industry, we expect the company to be re-rated.

Team 5 Paisa

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