Stock Review: ACC

 

ACC, an all-India player, and its results for the December 2010 quarter reflect the difficult operating environment for the broader sector, given a rising cost structure and weak realisations on a per tonne basis.

   Its consolidated operating profit margin declined 840 basis points year-on-year to 15.1% in the quarter under review, despite its net sales that grew 5.5% to 2,224.2 crore. The company follows a calendar year for its results.

   The quarterly results were broadly in line. The results were declared after the close of Thursday trade, and on Friday, the stock fell 0.9% to 977. ACC grappled with a near 2.7% year-on-year fall in realisations on a per tonne basis to 3,488 per tonne in the quarter. And coupled with higher operating costs, its net profit declined 10.7% in the quarter.

   Ambuja Cements, which is controlled by the Swissbased Holcim, also reported a 580 basis points year-on year fall in its operating profit margins to 19.3% in the December 10 quarter.

   Analysts highlight the absence of fresh government-funded infrastructure projects, coupled with uneven recovery in key user sectors like real estate across the country, curtailed cement demand in the December 10 quarter.

   Going forward, analysts point out that they are not expecting a substantial pick-up in cement demand in the short term. Also, with interest rates on an upward trend it could adversely affect the construction and real estate sector in the short term, and this in turn would have an impact on the cement industry.

   This comes at a time when total industry cement capacity is expected to increase over the next 18-24 months, and in turn cement realisations could remain under pressure. In addition, key raw material costs for the industry, like power & fuel, have not shown any signs of easing. This could continue to hurt operating margins for players in the cement sector over the next few quarters.

   ACC trades at a P/E of 17.1 times on a trailing four quarter basis and it factors in the company's growth prospects in the short term. Ambuja Cements trades at a P/E of 14.6 times on a trailing basis.