ACC: Control aspect underpins stock

Recommendation: Hold

S. Vaidya Nathan

ACC shareholders may stay invested as there is the possibility of some gains in price (in 12-18 months, if not immediately) linked to the battle for control.

On fundamentals, the picture may improve with the association of Gujarat Ambuja Cements.

THE Associated Cement Companies stock has been showing firm trends at a time when the stocks of quite a few other cement majors -- Larsen & Toubro, India Cements and Gujarat Ambuja Cements -- have suffered considerable declines. Though ACC too did show some price weakness, in recent trading days the stock has been firm amidst declines in the broad market. Even through price rallies, shareholders may stay invested.

Battle for control: Gujarat Ambuja Cements had picked up a 7.20 per cent stake in the company from the Tata group and has the first option to buy the remaining stake of 7.20 per cent held by the Tatas. There is the possibility of an open offer quite soon should SEBI decide that there has been a change in control.

The other prospect in this context is the possibility of the French cement major, Lafarge, approaching the shareholders directly. The Tata group stake was acquired by Gujarat Ambuja at Rs. 370 per share. Any major thrust to acquire control over the company will have to match this price. It is in this context that it may be better for shareholders to stay invested.

Ceding the top table: While it is the `control' aspect that is likely to underpin the stock, the company's fundamentals may gradually take a turn for the better. On key parameters, such as volume growth and operational efficiencies, ACC has tended to lag behind some of the major players in the cement industry.

It has ceded market share to the likes of Larsen & Toubro, Grasim, Gujarat Ambuja Cement and India Cements despite its established presence. With capacity additions not taking place as one would expect of a leading player and the company also shying away from the acquisition route, volume growth has been behind industry averages.

Even in the current year when the industry has grown by 15 per cent, ACC's volumes have improved by around 6 per cent. And it has also been joined at the top of capacity league now by the likes of Grasim, Larsen & Toubro and India Cements.

Fundamentals may get better: What may however improve the position of ACC is the involvement of Gujarat Ambuja Cement. If this linkage leads to better operational efficiencies over time and also prunes distribution and marketing costs, it could improve ACC's profitability.

This may well be the key factor as producer pricing power may improve only marginally given the demand-supply imbalance. This was evident in 1999-2000 when, despite good volume growth, the company has not managed to improve its earnings position due to average lower price levels. Once the capacity expansion is completed, better volume growth than in the last three years may also be possible.

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Financials, debt load: ACC's financials are not exactly in the best of shape. With a sizeable debt burden and weak cash flows from operations, interest outgo has been a drag on profitability. The sale of power plants in the course of 1999-2000 and a possible exit from non-cement related businesses may help cut the burden. If this comes through over the next year or two, ACC's balance-sheet may wear a more healthy look than it does today.