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S. Vaidya Nathan

SHAREHOLDERS of ACC can retain their exposure in the stock as the company's fundamentals continue to improve steadily. The earnings growth is likely to be aided by a firm undertone in cement prices in the regions where the company has a significant presence. There is scope for volume growth too over the next couple of years.

In this backdrop, ACC is likely to remain one of the preferred plays in the cement sector. We remain bullish on the long-term prospects of ACC; but the expected pressure on margins due to higher input costs tempers our immediate view.

If there are sharp declines — say, about 10 per cent — linked to trends in the broad market, they could be used to accumulate the stock. ACC still remains vulnerable to hostile bids, especially by global majors seeking a foothold in India (Gujarat Ambuja Cements holds a 14.4 per cent stake in the company .) Our primary recommendation is, however, not linked to gains driven by any such move. The scaling up of its earnings over the past years has narrowed the premium that the ACC stock enjoyed vis-à-vis its peers in the industry.

The risks to our recommendation are a sharp decline in cement prices and a further spurt in prices of key inputs such as coal and power. As ACC derives a substantial portion of its revenues from the northern and western markets, the former does not appear to be a major risk as demand-supply balance gradually improves.

ACC also has a strong presence in the eastern region, especially after its acquisition of IDCOL Cement in Orissa. This, coupled with the expansion plans, should create adequate room for volume growth. The effect of the acquisition, which was clinched at an attractive price, may be reflected in the earnings card over a one/two-year period. It was ACC's first move in the acquisition space after the process of consolidation started in the late 1990s.

The cash flows from the operation and the reduction in the level and cost of debt place it in a position to pursue further acquisitions. Any development on this front is likely to be a positive for the stock.

The funds raised through an offer of foreign currency convertible bonds a few months ago has also strengthened ACC's balance-sheet. The effect is also visible by way of a steady decline in interest costs.

The improvement in operating efficiencies, which has been a constant feature after the `strategic alliance' with Gujarat Ambuja Cements, is a story that is still not complete.

Efficiency gains could help neutralise, to an extent, the effect of any further hike in the prices of key inputs. Investors can hold on to the stock with a one/two-year perspective.

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