Buy ACC: A good investment option ::Business Line

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The stock of ACC, one of the country’s top three cement manufacturers, appears to be a good investment given strong prices in the southern States where the company sells over a third of its produce, higher outlays on housing in the recent Budget and political stability in the key market of Karnataka.

Cement demand is expected to grow by 7-8 per cent this fiscal after 5.5 per cent growth in 2012-13. The stock has declined 18 per cent from its high in October 2012. At Rs 1,239, the price discounts the last 12-month earnings by 17 times, against the historical PE band of 15-25 times. Ambuja Cements and UltraTech Cement are trading at around 20 times.

On replacement cost too, the stock is cheap. ACC is trading at an enterprise value of around $135/tonne, which is again at significant discount to both Ambuja Cements and UltraTech Cement.

ACC expanded its footprint in South India since 2011. Both demand and prices are likely to pan out positively for players in the southern region this year. Dealers expect execution of stalled projects in Karnataka to drive cement off-take. Prices in Tamil Nadu and Karnataka rule at around Rs 320-330/bag, up six per cent over the last year and may strengthen further. Higher realisations going ahead may help the company ward-off cost pressures to an extent.

For the March 2013 quarter, ACC reported a two per cent increase in net sales even as sales volume dropped. Freight and raw material costs had dented profit margins.

Operating profit margin was 17 per cent down from 22 per cent last year, following the merger of low-margin ready-mix concrete business.

However, ACC’s efforts to bring down power costs have started to yield results. Power costs as a percentage of sales dropped two percentage points to 22 per cent during the quarter.

In the international market, coal prices have fallen from $107/tonne in March 2012 to $92 by December 2012.

They now hover at $87/tonne. If the rupee strengthens from the current levels of 54 to a dollar, lower coal prices will translate to significant margin gains for the company.