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S. Vaidya Nathan

Monsoon effect may ensure healthy demand from rural areas.

EXPOSURES can be contemplated in the ACC stock. Improvement in profitability, driven by strength in prices and volume growth, and the scope for revenue expansion through acquisitions, point to room for valuation gains. However, exposures at the present price levels can be modest as the stock has run-up sharply over the past four months.

The ACC stock continues to trade at levels higher than the likes of Gujarat Ambuja Cements and Madras Cements, which are the top players in terms of profitability. Unlike in the past, the degree of speculative element built into ACC's stock price is significantly lower. For the first time in many years, ACC's earnings level now show signs of providing a fairly sound underpinning to the stock.

Pronounced uptrend

On performance parameters such as operating rates, efficiency levels and marketing, ACC continues to maintain the levels of improvement that became pronounced after the strategic alliance with the Gujarat Ambuja group. Its operating profit margins are still nowhere near Gujarat Ambuja's levels , even in a difficult year for the industry; given the age of ACC's capacities, they may be difficult for it to attain the levels. But its operating profit margins are now comfortably at the double-digit levels.

With a gradual rise in cement price levels over the past couple of months in most areas across the country, there could be a thicker coat of black in ACC's earnings card for FY 04. From a long-term perspective, the modest profits reported by ACC, even in the usually difficult July-September quarter, is significant.

On acquisition mode

The streak of aggression in the area of acquisitions is equally improvement. Even in 1997-2002 when there was a spate of acquisitions, ACC remained a mute spectator. It let Grasim, Larsen & Toubro, and Gujarat Ambuja Cements and, for a brief period, even India Cements match and overhaul it on capacity levels. But ACC now appears to be open to inorganic route for growth.

This shift is important, as this is the only way ACC can add to its volumes without disturbing the demand-supply equation.

ACC has over the past fortnight picked up IDCOL Cements owned by the Orissa government.

The price of Rs 180 crore forked out, with incremental investments that may be required for modernisation, appears attractive for a unit that adds about one-and-half million tonnes to the capacity at ACC's disposal.

The price tag should ensure that this acquisition pays off over a two-three years.

It also adds more strength to ACC's presence in the eastern region and provides an additional base to grow its capacities to cater to this market over the long term.

As the spectre of over-capacity gradually eases, a better balance between demand and supply is likely in the east and north, ahead of the other regions.

This could improve producer pricing-power and lend stability to prices. ACC with its significant presence in these regions would be a key beneficiary.

Hostile bid possible

On the equity ownership front, ACC continues to hold out possibilities for hostile bids.

The Gujarat Ambuja group has remained content with a 14.4 per cent stake.

This level does not afford it complete protection against hostile bidders, even if one assumes that the institutions would be willing to back it in a hostile bid situation.

Till such time Gujarat Ambuja consolidates its holdings, the hostile bid will continue to remain a factor in the pricing of the ACC stock.

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