ACC: Sell

Recommendation: Sell

S.Vaidya Nathan

SHAREHOLDERS in ACC can use the present firm trends in the stock price to pare exposures.

The possibility of efficiency gains under the auspices of the Gujarat Ambuja group, and the likelihood of a hostile bid may lead to a premium valuation for the stock.

But unless the hostile bid materialises, it is unlikely that there would be significant gains from the present price levels. In the last three quarters, the firm trends in cement prices have helped ACC report smart improvement in profitability parameters.

The scope for cement prices moving beyond levels seen in the second half of 2000 and the first few months of 2001 seems rather remote. Thus, in the next few quarters, sharp improvement in volumes may be necessary to perk up earnings growth.

The average growth rate may be rather modest, or worst, flat. ACC can be expected to do better given the aggressive approach of the Gujarat Ambuja group. This may help neutralise, to a large extent, the prospect of lower prices across the year and in various markets.

The key area where ACC's profitability could improve is in operating efficiencies. A vanguard group, Gujarat Ambuja is well-known for fairly high efficiency levels in operations. This is likely to be a part of ACC as well.

But because of its fair mix of old and new capacities, the efficiency levels may not match up to what Gujarat Ambuja Cements manages. The benefits on this score appear to have been factored in in the stock price.

The stock trades at a price earnings multiple of close to 15 times on its annualised earnings per share. To some extent, interest may be riveted on account of the turnaround factor. But even accounting for this aspect, the stock appears to be stiffly valued.

So, shareholders can cut exposures and contemplate re-entry at lower levels. This is indicated by the fact that the stock has been ruling firm on the back of a fairly impressive first quarter performance.

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For the first quarter of 2001-02, ACC reported revenues of Rs 735.03 crore, marginally lower than the Rs 765.37 crore managed last year. Helped by a sharp check in expenditure at Rs 592.15 crore (Rs 708.03 crore), the company has managed a turnaround in its fortunes.

With interest costs and depreciation charges also lower, the company has reported a profit of Rs 43.94 crore as against a loss of Rs 9.5 crore in the corresponding previous quarter. On an equity base of Rs 170.85 crore, the earnings per share is Rs 2.58.

The company now seems well on track, with prospects better than in the last couple of years. The possibility of cash inflows from sale of its non-core businesses could help clean the balance-sheet further. This may also keep interest cost under check. These could come in handy if cement prices do not do repeat the 2000 trends.

Suitability: ACC is basically suitable for investors with an appetite for risk. The risk is largely industry-related and it would require an active approach to book profit from time to time. A buy-and-hold strategy is unlikely to pay. If this is the only cement stock in the portfolio, there is more reason to act. The lack of information on what the Gujarat Ambuja group (that acquired a 14.4 per cent stake from the Tatas at Rs 370 per share) proposes to do with ACC is also an uncertainty to be reckoned with.