Stock Review: ACC

Cost pressures, monsoon hitting demand and excess capacities were expected to take a toll on the profitability of cement players in the September quarter. However, ACC has reported ahigher-than-anticipated dent.

The company posted its lowest margins in the past seven years, as average realisation dropped to `3,476 per million tonne (mt). Operating margins declined to 13.1 per cent from 35.1 per cent in the year-ago period, as raw material costs surged to `703/mt. Net profit slipped 77 per cent year-on-year to 100 crore. However, analysts say the worst seems to be over for the company. Work at the three million-tonne-per-annum (mtpa) clinkering plant in Chanda is on track and it is expected to be commissioned by December, taking the cement capacity to 30 mtpa. Its captive power capacity will increase 25 Mw to 346 Mw, which will lead to strong volume growth in calendar year 2011 (CY11), say analysts at Anand Rathi.

A series of price rises since September, coupled with a pick-up in construction activity after the monsoon, are expected to bring respite.

However, sustaining higher prices may be difficult due to excess capacities. Nevertheless, analysts say price realisation in the December quarter will be much better than the September quarter.

Angel Broking expects the company's top line to grow at a compounded annual rate of two per cent over CY2009-11, courtesy capacity addition, while operating and net profits are likely to decline 15.9 per cent and 22.8 per cent, respectively. The stock ended four per cent higher at `1,024 on Monday and trades at 15.7xCY10 and 13xCY11 estimated earnings.

Analysts say the worst may be over for the company as new capacities come on stream and margins improve