The ACC Ltd stock jumped at least 5% in trading on Wednesday after its results easily beat the street. Analysts said that while the revenue numbers came in as expected, the growth in profits exceeded expectations. Revenue growth for the stand-alone entity increased 14.4%. ACC’s dispatch figures for the Jan-March quarter show a year-on-year improvement of 6.6%, which means the rest of the rise in revenue has come from higher prices.
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But the real surprise has come from the increase in profits, with earnings before interest, tax, depreciation and amortization (Ebitda), rising by a huge 34%. The stand-alone company’s operating margin was a very high 32.7%, compared with 22% in the December quarter. Part of the reason was a credit of Rs19.68 crore due to a change in discounting rate in valuation of employee benefit liabilities. But even if we strip out that effect, ACC’s operating margin would still be a high 31.8%. The company management says that cost-cutting is a big reason. “Other expenses”, which includes items such as packing costs, repair and maintenance, advertising, consultancy costs, etc. have been pruned considerably. The management says that certain ERPs (enterprise resource programmes, a business software) running last year are now over and some contracts have been renegotiated. The increasing in pricing, too, has helped margins.
Is the increase in margins sustainable? ACC’s treasury head S. Krishnamurthy says current trends suggest that margins in 2009 will be higher than last year. Interest costs were much higher in the March quarter because the company had to provide for a claim of interest on delayed payment of royalty for earlier years. This is one-off in nature and the company intends to contest the claim.
Krishnamurthy also points out that the firm should be able to add another 4 million tonnes (mt) of capacity this year, in addition to the 22.62mt it had at the end of 2008. That should add to volumes.
For the industry as a whole, however, the new capacities that are likely to come on stream this year are expected to put downward pressure on prices.
Ashok Bhattacharjee, head, economic and sectoral analysis at ACC, says the long-term relationship between GDP growth and cement volumes over the past seven-eight years shows that when GDP rises by 1%, cement volumes rise between 1.2% and 1.3%. So, if the central bank’s projection of 6% GDP growth is correct, then we should see cement volumes rising by around 7.2%, which is lower than the 9% rise last year. With capacity expected to rise by 21%, that should mean lower prices.
Pawan Burde, cement analyst with Angel Broking Ltd, says the combination of lower demand and higher capacity will impact cement prices and the only reason it hasn’t done so already is because capacity utilization has decreased.
So far, however, the bank lending figures show robust growth in lending to real estate, construction and to the infrastructure sector, which is why cement prices have gone up.
Even if cement prices hold firm, it’s unlikely to do much for ACC’s stock. As Burde puts it, the stock is not cheap compared with its peers, both on a price-earnings multiple basis as well as on an EV (enterprise value)/Ebitda basis.
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