ACC: Higher fuel, freight charges will make the upside limited

ACC results for the June 2010 quarter reflect the difficult operating environment for the broader cement industry. Its realisations on a per tone basis declined marginally year-on-year (y-o-y) in the second quarter (company follows a calendar year), given the sluggish price realisations in the southern and western regions, coupled with higher power & fuel and outward freight charges on a per tonne basis.

Diesel prices were raised post the Union Budget and also towards the end of June, which adversely affected the cement industry. The difficult operating environment resulted in the company’s consolidated net sales that fell marginally to Rs 2,209.8 crore in the quarter as compared to the previous year. Operating margins also plummeted 750 basis points y-o-y to 26.9% in the quarter.

Net profit also fell 25.8% y-o-y to Rs 349.5 crore in the second quarter and the results were broadly below lower than ETIG and brokerage house estimates. The stock fell 1.1% to Rs 816 on Thursday. ACC’s consolidated net profit had also fallen marginally in the March 2010 quarter, and it had also faced a similar 26.9% y-o-y fall in its net profit in the June 2008 quarter. Going forward, analysts don’t expect any improvement in ACC’s performance, given the monsoon season in the country and sluggish demand conditions for this product.

Also, in key regions, like the South, capacity additions continue at a brisk pace at a time when demand has been sluggish, which will prevent any recovery in price realisations. ACC’s realisations declined marginally on a y-o-y basis to Rs 3,834 per tonne in the June 2010 quarter, and strong demand conditions in the northern region, helped to minimise the impact of weak realisations in the South and West, say analysts. Its despatches also fell 2.8% y-o-y to 5.27 million tonnes in the quarter.

In addition, ACC, also grappled with its outward freight charges that rose 9.1% on a per tonne basis, and power and fuel that grew 8.2%. Going forward, with the operating environment expected to remain difficult for the cement industry, and with ACC trading at 10.7 times on a trailing four-quarter basis.

Taking all above suitations the upside for ACC for short term (in next 5 months) looks very limited.

ACC current trading price is at Rs 816

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