ACC Limited (NSE:ACC)

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Geoffrey Jordan

ACC Limited (NSE: ACC), formerly Associated Cement Companies Limited, is India's largest cement manufacturing company by market share^[1][2], with revenue exceeding INR 70 billion and cement production of 19.92 million tons.^[3]

Key drivers of cement demand are real estate, infrastructure and industrial expansion.^[4] Faced with a slowdown in urban centers, leading cement firms are increasing their focus in rural markets. Rural India accounts for about one-third of cement sales in the country.^[5] This is further complemented by farm-loan waiver of INR 60,000^[6] crore to farmers. The scheme envisages a complete waiver of all loans to small farmers, which is luring companies like ACC to strengthen their presence in rural India.

The cement industry in India has added 46 megatons (MT) of capacity in just over three years, taking the total installed capacity to 206.96 MT.^[7] In India, taxes and levies account for nearly 60% of the ex-factory cost and nearly 20% of the current selling price of cement.^[8]

Company Overview

ACC`s operations are spread throughout the country with 14 modern cement factories, 19 ready mix concrete plants, 19 sales units, 54 area offices, and 194 warehouses. This is backed by a countrywide network of over 9,000 dealers.

Business and Financial Metrics

Second Quarter 2010 Results^[9]

During the second quarter of 2010, ACC Limited reported net sales of 216,688 Rs. lakhs compared to net sales of 218,821 Rs. lakhs in the second quarter of 2009. Net profit for the quarter was 34,947 Rs. lakhs compared to 47,098 Rs. lakhs in the year-ago period.

Business Segments

The Group operates in two major segments: Cement and Ready Mix Concrete.

Cement

The cement segment, the company's largest contributor towards net sales, includes sale of bagged as well as bulk cement. ACC produces three types of cement, Ordinary Portland Cement ,Portland Slag Cement, Portland Pozzolana Cement. This segment contributes 95.51% of ACC's revenue.

Bulk Cement: Bulk Cement, an alternative to bagged cement, which is of particular advantage to large consumers of cement.

ReadyMixConcrete

ACC set up India's first commercial Ready Mix Concrete (RMX) plant in Mumbai in 1994. From January 2008 this business has been reorganized as a separate wholly owned subsidiary company called ACC Concrete Limited. It has 30 modern plants in major cities across India.^[10]

Trends and Forces

Technological Changes

Continuous technological upgrading and assimilation of the latest technology occurs constantly in the cement industry in India. Currently 93% of the total capacity in the industry is based on modern and environment-friendly dry process technology and only 7% of the capacity is based on old wet and semi-dry process technology.^[11] There is tremendous scope for waste heat recovery in cement plants which reduces emission levels. One project for co-generation of power utilizing waste heat in an Indian Cement plant is being implemented with Japanese assistance under the Green Aid Plan.^[12] The induction of advanced technology has helped the industry immensely to conserve energy and fuel and to save materials substantially.

Pricing

Cement prices are dependent mainly on cost of raw materials, gypsum fly ash, limestone, transportation, coal, power tariffs and local excise duties.

The location of cement plants depends on their proximity to limestone deposits The lesser the distance, the lower the freight costs. Andhra Pradesh has the largest limestone deposits in India accounting for almost 32% of the total reserves.^[13]

Lower Impact of rising fuel prices

Approximately 90% of ACC’s coal requirements are sourced domestically. Imported coal is primarily used at its 1mnte plant in Tamil Nadu. Of the total domestic coal consumed, 20-25% has to be sourced from open markets (due to shortage of domestic coal), where prices are ~25-30% higher than domestic rates.^[14] This exposes the company to significant variations in the coal cost depending on the share of coal purchased from open markets.

Market Outlook

With a booming economy and a strong focus and demand for infrastructure, the Indian cement industry is all set to scale new heights. ACC, with a capacity of 19.9 million tons and increasing it to 27.5 ^[15]million tonnes has posted healthy growth of 25 percent in sales. But with the global economic meltdown in 2008^[16] leaving its effects on the Indian economy^[17], there is a dearth of capital in the market, leading to a decline in housing and construction. Also, most of the infrastructure projects have been shelved or delayed.^[18]

The housing sector, which accounts for around 55-60% of total cement demand, is likely to continue to be the leading force. The requirement of new dwelling units over a period of 25 years (1996-97 to 2020-21) will be around 140 million units requiring an investment of approximately INR 20,000 billion. Demand from infrastructure projects and industrial/commercial ventures account for 20% each.^[19]

Competition

The structure of the cement industry is fragmented, although the concentration at the top is increasing with around 54 companies operating with around 129 plants. The large players account for 93.3% of total capacity.^[20] Other large players in the cement industry in India are:

• Ambuja Cements, the company with largest market capitalization and cement output, manufactures and markets cement for both domestic and export markets. Currently Holcim holds about 45% of shares in Ambuja Cements Limited.^[21]

• UltraTechCement, a Grasim subsidary, has an annual capacity of 18.2 million tons. It manufactures and markets Ordinary Portland Cement, Portland Blast Furnace Slag Cement and Portland Pozzalana Cement. It also manufactures ready mix concrete (RMC).^[22]

• Madras Cements is another major player based in South India.

An interesting fact to be noted here, Holcim has a controlling stake in Ambuja Cements, and Holcim also has bought controlling stake into ACC through Ambuja Cements. So the two largest cements players (by market capitalization) in the Indian market are actually controlled by a single entity, Holcim.

Market Share

ACC's market share has been dropping over the years. Currently it stands at 12.2% pan-India. ACC is market leader only in Karnataka & Punjab.^[24]

References

1. ↑ http://www.moneycontrol.com/stocks/company_info/competition.php?sc_did=ACC06
2. ↑ http://www.financialexpress.com/news/Top-four-cement-cos-market-share-dips/415855/
3. ↑ http://www.acclimited.com/newsite/finance.asp
4. ↑ http://www.reuters.com/article/pressRelease/idUS116839+05-Jun-2008+BW20080605
5. ↑ http://www.business-standard.com/india/news/cement-firms-shift-focus-to-villages/20/09/344849/
6. ↑ http://indiabudget.nic.in/ub2008-09/ubmain.htm
7. ↑ http://www.ibef.org/industry/cement.aspx
8. ↑ http://www.equitymaster.com/detail.asp?date=11/21/2008&story=3
9. ↑ ACC Limited Investor Relations
10. ↑ http://www.acclimited.com/newsite/cement_services_rmc_en.asp
11. ↑ http://www.ibef.org/industry/cement.aspx
12. ↑ http://www.projectsmonitor.com/detailnews.asp?newsid=3747
13. ↑ http://en.wikipedia.org/wiki/Stones_of_India#Limestone_deposits_in_Andhra_Pradesh.2C_India
14. ↑ http://www.scribd.com/doc/4950824/Indian-Cement-Sector
15. ↑ http://www.rediff.com/money/2007/may/14acc.htm
16. ↑ http://www.globalissues.org/article/768/global-financial-crisis
17. ↑ http://www.rediff.com/money/2008/sep/19spec.htm
18. ↑ http://economictimes.indiatimes.com/High_rates_delays_infra_projects_CII/rssarticleshow/4029336.cms
19. ↑ http://nmcc-vikas.gov.in/Sector/Pages/Cement.aspx
20. ↑ http://nmcc-vikas.gov.in/Sector/Pages/Cement.aspx
21. ↑ http://www.gujaratambuja.com/finance_shareholding_final.html
22. ↑ http://www.ultratechcement.com/about_us/index.htm
23. ↑ http://www.moneycontrol.com/stocks/company_info/competition.php?sc_did=ACC06
24. ↑ http://www.karvy.com/compresearch/ACC.pdf