Mumbai: The manufacturing cost per tonne of ACC Ltd, India’s largest cement manufacturer by capacity, is the highest in the Indian cement industry, say analysts.
ACC’s manufacturing cost is Rs1,529 per tonne against the industry average of Rs1,056 per tonne.
India, the second largest cement market in the world, has a total installed capacity of 170 million tonnes per annum (mtpa), according to a report on the sector by domestic brokerage Karvy Stock Broking Ltd that was released last week.
Demand for cement in the country stood at 154.9mtpa for the year ended March.
Birla Corp. Ltd has the second highest manufacturing cost, Rs1,339 per tonne, followed by UltraTech Cement Ltd, at Rs1,240 per tonne.
The ACC share closed on Monday on the Bombay Stock Exchange at Rs1,285.95, gaining 2.83% on a day when the benchmark Sensex rose 639.63 points or 3.47%.
The Karvy report has an “underperformer” rating on ACC, based on the rationale that “the cement price would decline and freight and coal cost would increase, which would lead to de-rating of valuation”. The price-earnings multiple of ACC stands at 19.52, higher that the industry average of 14.86.
“ACC has the oldest plants,” says Sourav Mallik, associate director (investment banking) at Kotak Mahindra Capital Co. Ltd, the investment banking arm of Kotak Mahindra Bank Ltd. “Some plants are inefficient and it is uneconomical to run them.”
ACC has 14 plants at 12 locations nationwide—Madukkarai in Tamil Nadu, Wadi (two) in Karnataka, Chamda in Maharashtra, Bargarh in Orissa, Damodhar in West Bengal, Sindri and Chaibasa in Jharkhand, Jamul in Chhattisgarh, Kymore in Madhya Pradesh, Tikaria in Uttar Pradesh, Lakheri in Rajasthan, and Gagal (two) in Himachal Pradesh. The company has a manufacturing capacity of around 21mtpa and hopes to expand it to 27mtpa by 2009.
Amit Srivastava, an analyst with Karvy Stock Broking who tracks the sector, agrees that ACC has old plants, but says the firm is improving them.
“There is interest in the stock as the company can improve its operating margins following the practices of Ambuja Cements Ltd, one of its promoters and the lowest-cost producer (in terms of the overall cost of cement production). Besides, it can also exploit the synergies with Holcim Ltd’s wide expertise in areas of waste material processing in kilns, captive power plants and bio-fuels,” Srivastava says.
Holcim holds a 43% stake in ACC.
ACC spokesperson R. Nand Kumar disagrees with Mallik’s statement that his company’s plants are old. He says that most of ACC’s 14 plants have been modernized and “are capable of high levels of efficiency and capacity utilization”.
But Rupesh Sankhe, research and advisory manager for ICICIdirect, the online brokerage of ICICI Securities, feels upgrading plants yields limited benefit. “Most...ACC plants are old and their consumption of fuel and power is higher,” he says. “Modernization helps only to some extent.”
ACC’s operating margins have taken a hit because of the high manufacturing cost, analysts say. At around 34%, its operating margin is far below that of industry peers such as Ambuja Cements and Shree Cement Ltd, whose margins are around 44%.
Kumar disputes the contention that ACC’s manufacturing cost is high. “Some of our plants such as New Wadi in Karnataka are among the most efficient producers in terms of usage and cost. Comparison can be misleading,” he says.
ACC also disagrees with analysts on fuel and power usage being higher. “Our own analysis suggests we are more cost-efficient than most other cement manufacturers... In fact, our New Wadi plant has among the best fuel and power consumption level, making it an industry benchmark,” says Kumar. “According to published numbers, our plants at Lakheri, Gagal and Kymore are also comparable with the best. But we must caution that all comparisons cannot be strictly like-to-like as we have 14 plants across India.”
ACC has lined up Rs3,000 crore to modernize its plants. The programme is a “regular practice, necessary to maintain our cement plants in the best of conditions so that they can perform at peak efficiency and output levels”, it says.