Sunday, November 5, 2006

Associated Cement Companies Ltd. (ACC)

As part of an attempt to understand the sensex scrips, let's take a look at ACC.

Associated Cement Companies (ACC) is the oldest cement manufacturer in the country. ACC (consolidated) has a total capacity of 18.1 million tonnes (12% of total Indian capacity) and is the second largest player in the Indian market after the Grasim-Ultratech combine (31 MT). With 14 units and a 9,000 strong dealer network, ACC is one of the few cement companies to have a pan India presence. It is particularly strong in the northern and the eastern regions.

The cement industry has over the last decade managed an 8% CAGR and this momentum is sustainable over the next 2 to 3 years. This is on the back of the fact that the housing constructions boom being witnessed in the country currently seems unlikely to subside anytime soon. Further, the developments in Budget 2005-06, which have been maintained in Budget 2006-07, that provide for a possible exemption of Rs 2.5 lakhs (Rs 1.5 lakhs interest and Rs 1 lakh against principle repayment) from the total taxable income is a big factor that would aid the growth of the housing sector. The importance of the housing sector in cement demand can be gauged from the fact that it consumes almost 75%-80% of the country's cement. Further, as per estimates, there is still a significant amount of unfulfilled demand (19 m) for dwelling units in the country, which would keep the demand for cement ticking.

The industry had an excess capacity of close to 26 MT (FY05), which has been considerably reduced from the near 33 MT in FY02. Further, with the lack of any significant greenfield capacity coming on stream over the next couple of years and the demand expected to grow at 8% per annum, the demand-supply dynamics is set for further improvement. Though 5 to 6 MT per annum of brownfield capacity is a reality, it is not sufficient to upset the demand-supply equation of the industry.

Gujarat Ambuja, in consortium with Holcim, has a 34% stake in ACC and as a result, ACC can benefit from Ambuja's expertise in manufacturing cement at a lower cost.

However, on account of company's poor operating margins (16% in FY05 as compared to 20%-25% achieved by its peers), the company is more susceptible to price fluctuations as compared to its peers in the industry.

The capex with respect to hiking its cement and power capacities is estimated to be about Rs 6-7 bn. The regular maintenance capex would be in the vicinity of about Rs 1 bn per annum. In FY05, the company had incurred a capital expenditure of nearly Rs 6 bn, which includes the purchase of the captive power plant from Tata Power (Rs 2.4 bn)

Cement is essentially a commodity where a mere 1% or 2% fall in demand can have a significant impact on prices. Therefore, it is imperative that the industry has a certain level of consolidation in order to prevent free fall in prices.

How much sense does it make? To buy or to sell??
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