ACC Ltd. – Poised to grow in thelong termACC Ltd. is India’s oldest and second largest cement company with a total Capacityof 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 theworld’s largest cement kiln with 12500TPD capacity. It was acquired in 2005 byHolcim Ltd – one of the world’s leading suppliers of cement. Ambuja Cements is alsoa part of the Holcim group.ACC ltd. has a pan India presence. This geographical diversity lends it a uniqueadvantage. Since cement prices vary across regions, this pan India presence augurswell 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 overallmanufacturing pie mainly because of the presence of its sister company viz. AmbujaCements in the western region. (The regional distribution of ACC’s cement capacityis given in the pie-chart). Also, one of its main advantages is that it is backwardintegrated 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 verynature of the cement industry. Over a 5 year period the company has grown its NetSales 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 beenrated 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 previousyear. Net Profit at Rs. 167.5 Cr. was up by 67% mainly due to higher other incomeand fall in purchase of traded cement.Going forward: The Company is seeing increasing dispatches – month ofDecember saw an increase of 9% in dispatches. But on the costs front, the outlookof coal (a key raw material) in terms of availability and pricing does not seem toofavourable.Also, the overall outlook of the cement industry is bleak. The cement Industry isfacing one of its weakest cycles, with large capacity addition coming online, thecement 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 remainsuppressed due to oversupply of cement and coal costs.Hence, the short-term future prospects of the company can be expected tobeOrange (‘Somewhat Good’).Competitive Advantage – What makes ACC a leader?Over the years ACC has developed a few competitive advantages which havehelped 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 enjoyeconomies of scale like most other peers. Significantly the company’s net pricerealizations per tonne of cement are higher than that of Ultratech Cement across thewhole Industry cycle. The higher prices realizations are because ACC cement isconsidered to be a premium brand than Ultratech Cement. It recently introduced anew product specifically meant for use in coastal regions; introduction of such regionspecific products will help it continue to command a premium pricing.• One of the most innovative companies. This gets reflected in its enhancedoperational efficiencies, optimum capital structure, negative non-cash workingcapital, and a First Mover advantage in Ready Mix Concrete. Its association withHOLCIM and Ambuja Cements will allow it to derive large economies of scale, andbest international practices e.g. HOLCIM’s European plants on an average have20% of its energy been met by alternative fuel and raw material. Such technologyexposure 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 CaptivePower Plant (CPP) capacity of 361 MW from Coal Power Plants and 19 MW of WindTurbine Generation. Currently ACC derives about 65-66% of its power needs fromCPP and about 33% from SEBs. CPP produced power is at least 35% cheaper thanthe power purchased from SEB’s or externally. ACC has been continuously addingCPP power to its Energy Portfolio. By the end of Q3 CY 2011 ACC would haveincreased its CPP power by 25MW by commissioning a 25MW CPP at WADI. Thiswill have a positive impact on the company’s costs and hence augur well for itsmargins.
Product Analysis: Cement inherently is a commodity product, but Ready MixConcrete (RMC) is a highly specialised product. ACC Concrete currently contributesjust 7% of sales to ACC. Going forward this is expected to increase to the globalaverage of around 30-40% of ACC revenues coming from RMC business. This alsois expected to have a positive impact on NPM and ROIC.Geographical Presence: ACC has a pan India presence with large exposure incapacity terms to Southern and Northern India. The figure below highlights its marketshare in various regions in India.Expansion plans: Coal Prices remains the significant risk to the profitability of ACCbusiness. As a way of De-risking its business ACC is actively scouting for COALBLOCKS in India and outside India through its subsidiary ACC Minerals ResourcesLtd. The subsidiary already has a Joint Venture Agreement with Madhya PradeshState Mining Corporation Limited for development of four coal blocks.Industry Prospects and Structure: India’s per capita consumption of cement is just1/7th of China. This per capita consumption is expected to increase led by largeInfrastructure and roads build up that is necessary to maintain an 8-9% GDP growthrate in the next decade. Revival in roads contract by the government and the realestate industry will give a flip to Cement industry. But large capacity additions arealready planned with about 40MMTPA coming on stream in 2011, this would keepthe Cement markets weak over short term and may lead to likely consolidationamong cement players in the next few years. All this may result in lower profitmargins than what ACC has seen over last 5 years.Rising energy prices remains the biggest concern for ACC. Power & fuel andfreight prices both are impacted by energy prices. Both power & fuel and freightconstitute together about 36% of ACC’s Sales. Any significant increase in Energyprices thus remains a significant risk towards maintaining Profit margins at healthylevel.
Demand-Supply mismatch:Cement Industry is facing one of its weakest cycles, with large capacity additioncoming 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 isexpected to grow at 10% CAGR over next few years, planed capacity additionswould lead to large Demand Supply gap. This is a cause for concern for manycement players as demand as well as realizations will be affected for the next coupleof years.Hence, despite these concerns over a long-term period, ACC is expected to havegood growth at the back of its strong competitive advantages, pan-India presenceand expansion plans. Hence, the long-term future prospects of ACC are expected tobe Green (Very Good).ACC Ltd. is India’s second largest cement player. With strong competitiveadvantages like its leadership position, backward integration and operationalefficiency, 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 ofthe company indicates? Click to view the chart
ACC is among those very few stocks that are in longer term uptrend from theirbottom 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 beensuccessful. 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 tofundamentals. One should always take an investment decision based on howfairly is the company priced.Considering its fundamentals, ACC Ltd. is an investment worthy company. It isconsidered to be a safe-bet as compared to mid and small cap stocks. However, thecurrent sluggish scenario in the cement industry as a whole does create concerns forthe short-term. Thus, investors should invest in the company only at a discount to itsMRP..