ACC Cement Q1CY12 Earnings’ Review

ACC Cement, one of the largest cement manufacturing companies in India, announced its Q1CY13 result on Thursday, April 19.The topline of the company during the quarter grew by 18 per cent on a YoY basis to Rs 3,015 crore.However, due to unexpected one-time depreciation, the bottomline of the company declined by 57 per cent on a YoY basis to Rs 149 crore. However The company has posted good operating performance during the quarter grew by 13.65 per cent on a YoY basis to Rs 618 crore.

Despite the higher raw material, power and fuel costs due to a hike in the prices of coal, fly ash and gypsum, the operating margins of the company declined by 90 bps to 20.50 per cent as compared to 21.40 per cent in the same period last year. The higher sales and decent operating performance of the company was on the back of improved sales volume and a pick-up in sales realisation due to hike in the cement prices during the quarter. The sales volume of the company during the quarter grew by 9 per cent on a YoY basis to 6.72 million tonnes and the realisation jumped by 10.1 per cent on a YoY basis to Rs 4,248 per tonne.

Although the company has reflected good operating performance, the change in the depreciation method has impacted the bottomline of the company. The company has acknowledged an additional depreciation charge of Rs 341 crore (including Rs 335 crore related to earlier years disclosed as an exceptional item). Hence, the profit after tax is Rs 149 crore (in case of the earlier method of depreciation the profit after tax would have been Rs 383 crore).

This change would also have had no impact on its EBITDA and cash profit for the quarter ended March 2012. However, if we take the adjusted net profit also, the net profit margins will decline significantly by 110 bps on a YoY basis and 480 bps on a QoQ basis. The fall in the net profit margins was mainly on account of the high interest cost.

The higher depreciation during the quarter was on the back of a change in the accounting policy of the depreciation method from the ‘straight line’ to the ‘written down value’ method on fixed assets pertaining to its captive power plants. The company has said that the change in the depreciation method will result in a more appropriate presentation and will give a systematic view of the depreciation charge, representative of the time pattern in which the economic benefits flow to the company.

We believe that the company has posted decent March quarter numbers, particularly in terms of the topline and on the operating side despite the high cost of raw materials and an increase in freight costs. However, the higher exceptional loss due to change in the depreciation method and the high interest cost dented the bottomline of the company. But this was a one-time of cost and would not arise in the coming quarters.

Going forward we expect the company to post decent topline in Q2CY12 mainly on account of the pick-up in demand from the infrastructure and construction sector although this would slow down once the monsoon season begins. Also, the high raw material cost of coal and fly ash coupled with the higher rail freight cost due to a 20 per cent hike by Indian Railways will affect the bottomline performance of the companies as both the costs constitute a major portion of the overall cost of sales.