ACC: Good investment bet despite outperformance last year

Ending months of speculation about the quantum of royalty, ACC's board of directors has finally decided to pay 1% of the net annual sales as ‘technology and knowledge fee' to Holcim, its Swiss parent.


Since the new fee is applicable from 1 January 2013, this will start affecting the results in the coming quarters. However, analysts are upbeat about the counter because the fee is below the market expectation of 2%. Moreoever, ACC has paid around 0.3% as fee to Holcim in 2011. Therefore, the additional increase is 0.7%, which will restrict the negative impact on the future EBITDA to around 3.5%.

Despite the cement glut in south India—most cement plants are operating at capacity utilisation levels of 55-65%, against the all-India average of 75%—companies like ACC, which are operating in other parts of India, are doing well.

The overall cement demand is also expected to get a fillip due to the upcoming election season. This has happened in the past mostly because the government tries to implement several pending projects, such as roads and rural housing schemes, before the elections. With the incremental supply additions taking place at a lower pace compared with the demand growth, the all-India capacity utilisation is expected to improve further to around 80% by 2014-15.

Since the capacity expansion of ACC is taking place in non-glut areas like Sindri, (Jharkhand), Jamul (Chhattisgarh) and Kharagpur (West Bengal), its capacity utilisation rate is expected to improve from 79% in 2012 to 95% in 2015. This will also help it to maintain pricing power. ACC should be able to notch a volume growth of around 8% per annum during the next few years. Its plant load factor (PLF) is expected to go up from the current 66% to 80% by 2015.

The increased contribution of captive power due to the rise in PLF at its captive power plants, and commissioning of 7.3 MW waste heat recovery plant, will help the company to reduce its dependence on costly grid power. This will improve its EBITDA margin in the next few years.