A Subdued Performance - ACC

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The capacity additions by the cement manufacturers that has taken place in the recent past in India is likely to act as a deterrent for the sector as a whole. In the past we have seen that there was a demand supply mismatch where the demand was much more than the supply which enthused cement makers to ramp up their capacities.  Therefore, while focusing on the cement sector at this point of time, we are on the bearish side. ACC being the largest cement player in India is also likely to face the same heat as the sector faces. At this point of time, ACC looks fairly valued (reasons mentioned later) and is likely to give a subdued return for the next couple of years.

Talking about the region-wise sales, ACC has a pan-India presence without concentration in any particular region. In terms of market mix, North India contributes 24 per cent, Central India 23 per cent, East India 21 per cent, West India 13 per cent and South India 19 per cent to volumes. After the new capacities begin operations, ACC would have strengthened its presence in the west (22 per cent) and South (23 per cent). As mentioned earlier, the cement manufacturers are adding capacity. ACC being a market leader is also not behind in this race. ACC is adding a total 7.2 million tones (MT) brownfield capacity across three locations, of which two have become operational from Q1CY10, after delays of 2-3 quarters.

ACC expanded capacity in Orissa (1.2 MT, operational in Q1CY10), in Karnataka (3 MT, operational in Q1CY10 in a phased manner) and in Maharashtra (3 MT, to be operational by Q4CY10). After the commissioning of these capacities, its volume growth is likely to increase by 10 per cent CAGR over CY09-11, against muted growth of 3.8 per cent CAGR over CY07-09. It has a capex outlay of Rs 3,000 crore to be spent in CY09-10E to augment the plant capacities and increase captive power generation capacities. Post these expansions, the total capacity would go up to 30.2 MT by end CY10E. Captive power capacity would be augmented by 12 MW in CY09 and 85 MW in CY10E.

In the recent past, ACC has entered into an agreement with the Madhya Pradesh State Mining Corporation for mining of four coal blocks in the state at different locations. This will exclusively be used to supply coal for its cement plants at Gagal, Kymore, Tikaria and Lakheri, which currently sources coal through e-auctions and in the open market. Further, CIL has allotted ACC in JV with other partners a coal mine at Moira-Madhujore in West Bengal. The coal from this mine will be used at its eastern cement plants. But the mine will take 4-5 years to be operational. This remains a concern as coal costs have started to increase with Coal India announcing a 11 per cent hike in coal prices, which may affect margins by around 1.5 per cent going forward as it uses 90 per cent of the total coal requirements from domestic sources. Power and fuel comprises around 23 per cent of the total raw material cost.[PAGE BREAK]

The industry scenario suggests that the north-based cement manufacturers have continued to grow strongly, with despatch growth of 22 per cent compared to the continuing lacklustre performances of south-based companies with growth of around 7 per cent. Though the all-India capacity utilisation levels declined YoY to 82 per cent from 88 per cent, for north India the utilisation remained healthy at 87 per cent (flat on a YoY basis), while manufacturers in the south continued to be hurt by poor demand and continuing capacity increases, leading to sub-par utilisation of 70 per cent (down YoY by 900 BP). Overall, India despatches in May rose by 8 per cent YoY, though the trend is towards decelerating growth, which we expect to remain weak given the slack construction season due to monsoons over the next 2-3 months.

In the next couple of months the performance of the sector may remain subdued due to monsoons. The decline in the despatch figures that has been witnessed in the last month cannot be ruled out going forward. We have seen that there is a capacity build-up in the cement space across all companies. This activity may prove to be a deterrent as we may witness more supply over demand provided the real estate activity does not pick up as expected. At present the companies are functioning at 82 per cent capacity utilisation as on May 2010 as compared to 88 per cent in the same period a year ago. Talking about ACC, we may see the same thing happening going forward. The despatches have witnessed a downtrend for the month of May 2010 and stand at 1.75 MT as compared to 1.94 MT in March 2010.

At its current market price (CMP) the stock trades at a P/E of 10.36x for its CY10 earnings. The valuation when compared with other peers is fairly valued at this point of time. The year to date return stands at 1 per cent in the negative and the performance has been fluctuating from 2007 onwards (please refer to table on first page). The enterprise value (EV) per tonne for ACC is Rs 5,443 against Rs 6,735.22, Rs 6,495.98 and Rs 3,539.24 for Ambuja Cements, Ultratech and Shree Cements respectively. We can see that the EV per tonne of ACC is much lower than Ambuja Cements and Ultratech Cement but is much higher when compared to Shree Cements. We advise our readers to enter Shree Cements in place of ACC if they want a cement stock in their portfolio.