Stock Review: ACC

ACC's results for the September 2010 quarter were sharply below analysts' estimates due to a steep fall in its realisations and lower sales volumes following the weak monsoon demand. In the near term, even though demand is likely to pick up, the company may still face pressure on realisations since new cement capacities should ensure enough supply to meet the demand pull.

   ACC's performance during the September 2010 quarter was adversely impacted by a 13.8% year-onyear drop in realisations to 3,389.7 per tonne. The company's cement sales volume also fell by 3.6% to 4.8 million tonnes in the quarter. As a result, the all-India player's consolidated operating margin declined nearly three-fifth compared with a year earlier to 12%. Net sales also dipped 14.3 % to 1,811.3 crore in the quarter. ACC follows a calendar year for its results.

   The near record monsoon this year across different parts of the country affected demand conditions for cement, a key raw material for the construction sector. In addition, the cement industry has been grappling with additional capacities coming on stream, especially in the south, and the demand lagging.

   The broader cement industry's capacity utilisation fell from 77% a year ago to 72% in September 2010. Apart from weak realisations, ACC was also adversely impacted by a rising cost structure. This eroded its consolidated net profit by nearly four-fifth to 86.3 crore compared with a year earlier.

   Construction activity usually picks up post the monsoon season and that should increase the demand for cement. Media reports say that cement prices over the past few weeks have been raised in several parts of the country. This would be crucial considering that ACC's capacity would rise by an additional three million tonnes shortly. Its installed cement production capacity was 26 million tonnes at the end of the 2009 calendar year. Despite the disappointing quarterly results, expectations of a pick-up in demand buoyed ACC's stock by 1.5% on Thursday. The stock had reached its 52-week high in early October. However, the addition of capacity may hamper realisations in future despite the better demand expectations.

   According to brokerage estimates, the surplus capacity in the cement industry is expected to rise one-third to nearly 60 million tonnes by FY 11 end. This may hold prices down going forward. At CMP, ACC's stock trades at a P/E of 16.7 times on a trailing four-quarter basis and is one of the most expensive stocks in the sector.