ACC Cement

ACC as a company needs no introduction of its own. It’s a well known big player in the cement industry. The current share price of the company suggests a strong upside and is a Buy for us. The cement prices continue to remain firm in key markets of ACC despite a lower demand than the estimated demand. Manufacturing capacity is being increased mainly in the eastern region which is expected to get commissioned by 2015.

As far as the performance of the stock is concerned, due to the rising freight cost and low demand, the stock has underperformed broader indices during the past few months.

The correction in the share price is an indication for the right time to move into the investment and thus we recommend the stock as a BUY.

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Key highlights about ACC Cement

Due to lower than expected demand the company’s dispatches registered a muted growth of just 1.6% during 2012. However, the cement price hike helped the company in a big way. The price hike resulted in revenues growing by 11.5% for year 2012.

The Company is currently expanding its presence and also expanding the capacity. It is setting up additional clinker capacity of 2.8 MT and a grinding unit of 1.1 MT at Jamul, Chhattisgarh. The additional Capex is likely to enhance company’s capacity by 5 MT by end of 2015.

The pre-election spending along with the expectation of revival in infrastructure will result in improving cement volumes. It is expected that the company’s sales and revenues will grow by 16% for CY13.

Problems due to Cost pressures

There has been immense pressure on the pricing of cement due to rising cost. Due to steep hike seen in freight, power and fuel expenses in the past, a rise in the cost is seen. Also there has been a significant rise in raw material prices which is expected to continue its uptrend. This will create some pressure on the company.

Some of the key problems with costs are:

i) Raw material cost per tonne: Raw material costs are high due to high cost of gypsum, fly ash and slag.

ii) Power and fuel cost per tonne: Power and fuel consumption costs has been rising. Higher price of coal and reducing availability of linkage coal are some of the major hindrance for the company. It is difficult for the company to reduce is expenditure on fuel in near future despite ACC using alternate fuels to mitigate the fuel risk. Company is however developing its own coal blocks which might reduce its dependence on sourced coal.

iii) Freight cost per tonne: Freight costs are high and are likely to remain high due to hike in diesel prices as well as higher railway freight rates. It is expected that the freight cost per tonne will continue upward trend in 2012.

iv) Other expenditure: Royalty payments to Holcim is the other expenditure company is incurring. The royalty payment is expected to rise when an increase in the royalty rates to 1% of the sales is implemented. For packaging too, the baggage charges coupled with higher repair and maintenance charges are likely to keep total expenditure per tonne high.

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ACC Cement Financials

Revenue is expected to grow by 15-16% in 2013-14.

Valuation and recommendation

Currently the stock is trading at 13x P/E and 7.0x EV/EBITDA. A target of nearly 1390-1400 is expected in the market and thus I recommend a BUY for the stock at current price. Demand is likely to firm up going forward. Demand when coupled with revised pricing structure will definitely help the company and we expect to see a improved scenario for the company in the coming quarters.