ACC: Play in small numbers

S. Vaidya Nathan

Investment in small lots can be contemplated in the ACC stock especially by using any declines from the present price levels.

The lower level of cement prices as compared to 2000 is bound to have an adverse effect on earnings level of the industry. But the sharp spurt in volumes for ACC and improvement in efficiency levels may provide a cushion against lower cement price levels.

Business Line had suggested a sell on the stock in July-early August when the stock ruled in the Rs 140-Rs 145 range. Subsequently, the stock had declined and has traded in the Rs 115-Rs 125 range.

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Suitability: ACC is suitable for investors with an appetite for some degree of risk taking. Investors would also have to follow an active approach to book profit from time to time. A buy-and-hold strategy is unlikely to pay.

The volume story: In contrast to the picture of the first quarter of 2001-02, there are indications that ACC is gaining in market share at a brisk pace. The volume growth could help ACC maintain its earnings in positive terrain in the July-September period. The company had managed to report profits for the April-June quarter on the back of a tight check on expenses.

The manner in which ACC's volumes have improved is a clear break from the past. Even in 1999-2000, when the industry volumes grew by around 16 per cent, ACC was well behind the industry average.

But now ACC has reported a volume growth of 10.3 per cent for the first half with the big spurt coming in July, August and September. For instance, ACC reported a 27.35 per cent increase in cement despatches in September 2001.

Some improvement in operating efficiency was always expected once the company management came under the auspices of the Ambuja group. The trends in efficiency gains in the April-June quarter coupled with the recent spurt in volumes places the company on the right track in a commodity industry. The move to get out of non-core businesses could help clean the balance sheet further.

Valuation: The ACC stock has generally traded at a premium valuation compared to the peers in the industry. This is due to a variety of factors such as the speculative interest, the possibility of a hostile bid and efficiency gains under the auspices of the Gujarat Ambuja group.

This aspect of its valuation could limit the upside in the stock (unless the cement price levels move up and lead to a scaling up of earnings). This makes it more imperative for investors to book profits from time to time.

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. Aided by a sharp decline in operating expenditure and in interest costs and depreciation charges, ACC reported a profit of Rs 43.94 crore as against a loss of Rs 9.5 crore in the corresponding previous quarter of 2000-01. On an equity base of Rs 170.85 crore, the quarterly earnings per share was Rs 2.58.