ACC Ltd. – Poised to grow in the long termACC Ltd. is India’s oldest and second largest cement company with a total Capacity

of about 30 MMTPA. It commands a market share of 10.3% compared to 18.3%

of Ultratech Cementsand 9.6% of Ambuja Cements. It recently commissioned the

world’s largest cement kiln with 12500TPD capacity. It was acquired in 2005 by

Holcim Ltd – one of the world’s leading suppliers of cement. Ambuja Cements is also

a part of the Holcim group.

ACC ltd. has a pan India presence. This geographical diversity lends it a unique

advantage. Since cement prices vary across regions, this pan India presence augurs

well for the company as it de-risks the effect of this price change to a certain extent.

It is only in the western region that ACC has a low presence in its overall

manufacturing pie mainly because of the presence of its sister company viz. Ambuja

Cements in the western region. (The regional distribution of ACC’s cement capacity

is given in the pie-chart). Also, one of its main advantages is that it is backward

integrated as far as its requirement for power is concerned.

Good growth in Sales and EPS: The analysis of the company’s 10 YEAR X-

Ray indicates that it has had a cyclical performance. This comes from the very

nature of the cement industry. Over a 5 year period the company has grown its Net

Sales by 12.4%; this is on account of increasing capacity expansion and higher

realisation of prices.  Its EPS (earnings per share) have increased at a much faster

rate of ~18% CAGR over 10 years.

Increased profit margins: The large earnings growth has come because of

decreasing reliance on electricity provided by SEB (State Electricity Boards) as the

company is backward integrated as far as power requirement is concerned. Also,

higher cement prices and lower interest costs have augured well for its earnings

growth. This fast growth in earnings compared to sales has resulted in higher NPM

(Net Profit margin) today over the start of the decade. Its NPM in 2003 was ~5% with

capacity utilization at 83% compared to NPM in 2010 at ~14% and with capacity

utilization at 77%. Thus, a lower capacity utilization still leads to higher NPM, this

has occurred largely due to higher operational efficiency and much better Capital

Structure.

High ROE and ROIC: ACC has enjoyed a high ROE and ROIC over the last decade

because of the operational efficiency, more optimal capital structure, and negative

non-cash working capital.

o Operational efficiency which is evident from its rising NPM despite lower

capacity utilization.

o An optimal capital structure evident from its Debt/Equity ratio which was

1.68 about a decade ago and has pared down to just 0.48. The company’s capacity

expansion programs over the years have been financed mainly out of its earnings

rather than debt. This has had a positive impact on the company’s NPM.

o ACC and Ambuja Cements are the only large cap cement company to enjoy

a negative non-cash working capital. This means that it takes more credit from its

vendors than it keeps inventory and it gives credit to its customers. This has largely

come because, ACC can leverage its large economies of scale, its brand to run a

very tightly run ship.

All these 3 points allow the company to enjoy a good NPM and higher ROIC

and ROE.

Looking at all this the company’s 10 YEAR PERFORMANCE has been

rated GREEN (Very Good).

Impressive quarterly performance: The Company registered a good growth (31%)

in its Net Sales backed by volume growth (up 17%) as compared to the previous

year. Net Profit at Rs. 167.5 Cr. was up by 67% mainly due to higher other income

and fall in purchase of traded cement.

Going forward: The Company is seeing increasing dispatches – month of

December saw an increase of 9% in dispatches. But on the costs front, the outlook

of coal (a key raw material) in terms of availability and pricing does not seem too

favourable.

Also, the overall outlook of the cement industry is bleak. The cement Industry is

facing one of its weakest cycles, with large capacity addition coming online, the

cement market across India is expected to stay weak for the next few quarters.

Hence, the company is expected to witness growth in sales, but margins may remain

suppressed due to oversupply of cement and coal costs.

Hence, the short-term future prospects of the company can be expected to

beOrange (‘Somewhat Good’).

Competitive Advantage – What makes ACC a leader?

Over the years ACC has developed a few competitive advantages which have

helped it maintain its leadership position. These are:

• It’s all India market share of 10.3% after Ultra Tech’s 18.3%, allows it to enjoy

economies of scale like most other peers. Significantly the company’s net price

realizations per tonne of cement are higher than that of Ultratech Cement across the

whole Industry cycle. The higher prices realizations are because ACC cement is

considered to be a premium brand than Ultratech Cement. It recently introduced a

new product specifically meant for use in coastal regions; introduction of such region

specific products will help it continue to command a premium pricing.

• One of the most innovative companies. This gets reflected in its enhanced

operational efficiencies, optimum capital structure, negative non-cash working

capital, and a First Mover advantage in Ready Mix Concrete. Its association with

HOLCIM and Ambuja Cements will allow it to derive large economies of scale, and

best international practices e.g. HOLCIM’s European plants on an average have

20% of its energy been met by alternative  fuel and raw material. Such technology

exposure will lead to next phase of Growth in NPM over next two decades.

• Its backward integration as far as power is concerned. ACC has a Captive

Power Plant (CPP) capacity of 361 MW from Coal Power Plants and 19 MW of Wind

Turbine Generation. Currently ACC derives about 65-66% of its power needs from

CPP and about 33% from SEBs. CPP produced power is at least 35% cheaper than

the power purchased from SEB’s or externally. ACC has been continuously adding

CPP power to its Energy Portfolio. By the end of Q3 CY 2011 ACC would have

increased its CPP power by 25MW by commissioning a 25MW CPP at WADI. This

will have a positive impact on the company’s costs and hence augur well for its

margins.

Product Analysis: Cement inherently is a commodity product, but Ready Mix

Concrete (RMC) is a highly specialised product. ACC Concrete currently contributes

just 7% of sales to ACC. Going forward this is expected to increase to the global

average of around 30-40% of ACC revenues coming from RMC business. This also

is expected to have a positive impact on NPM and ROIC.

Geographical Presence: ACC has a pan India presence with large exposure in

capacity terms to Southern and Northern India. The figure below highlights its market

share in various regions in India.

Expansion plans: Coal Prices remains the significant risk to the profitability of ACC

business. As a way of De-risking its business ACC is actively scouting for COAL

BLOCKS in India and outside India through its subsidiary ACC Minerals Resources

Ltd. The subsidiary already has a Joint Venture Agreement with Madhya Pradesh

State Mining Corporation Limited for development of four coal blocks.

Industry Prospects and Structure: India’s per capita consumption of cement is just

1/7th of China. This per capita consumption is expected to increase led by large

Infrastructure and roads build up that is necessary to maintain an 8-9% GDP growth

rate in the next decade. Revival in roads contract by the government and the real

estate industry will give a flip to Cement industry. But large capacity additions are

already planned with about 40MMTPA coming on stream in 2011, this would keep

the Cement markets weak over short term and may lead to likely consolidation

among cement players in the next few years. All this may result in lower profit

margins than what ACC has seen over last 5 years.

Rising energy prices remains the biggest concern for ACC. Power & fuel and

freight prices both are impacted by energy prices. Both power & fuel and freight

constitute together about 36% of ACC’s Sales.  Any significant increase in Energy

prices thus remains a significant risk towards maintaining Profit margins at healthy

level.

Demand-Supply mismatch:

Cement Industry is facing one of its weakest cycles, with large capacity addition

coming online. The cement market across India is expected to stay weak till 2015.

Capacity utilization won’t reach near its decade high before 2015. While demand is

expected to grow at 10% CAGR over next few years, planed capacity additions

would lead to large Demand Supply gap. This is a cause for concern for many

cement players as demand as well as realizations will be affected for the next couple

of years.

Hence, despite these concerns over a long-term period, ACC is expected to have

good growth at the back of its strong competitive advantages, pan-India presence

and expansion plans. Hence, the long-term future prospects of ACC are expected to

be Green (Very Good).

ACC Ltd. is India’s second largest cement player. With strong competitive

advantages like its leadership position, backward integration and operational

efficiency, in the long-term ACC Ltd. is poised to grow.

Currently, its stock price is at Rs. 1174. So, let’s see what the technical chart of

the company indicates? Click to view the chart

ACC is among those very few stocks that are in longer term uptrend from their

bottom in  2008/09. The stock has been trading in an upward channel since 2009.

Till now, stock’s attempt to break this channel (upward or downward) has not been

successful. Investors should watch out for price movements near these parallel lines.

Any break out (again upward or downward) could lead to a major price movement.

However, remember technical should only be used as a supporting tool to

fundamentals. One should always take an investment decision based on how

fairly is the company priced.

Considering its fundamentals, ACC Ltd. is an investment worthy company. It is

considered to be a safe-bet as compared to mid and small cap stocks. However, the

current sluggish scenario in the cement industry as a whole does create concerns for

the short-term. Thus, investors should invest in the company only at a discount to its

MRP.

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