ACC: Low demand, high costs

ACC: Low demand, high costs
Published: 29 October 2008

According to reports from India’s Business Standard newspaper, management at the Rs 7,067-crore ACC believes that the economic environment is turning unfavourable as growth of cement consumption in the coming months, particularly in housing and infrastructure sector, may decline.

Demand figures have already been lowered; earlier estimates of 9-10 per cent demand growth has been adjusted to seven per cent. Industry watchers believe that a surplus amount of around 10Mt of cement would be in the market as an additional amount of 16Mt is added by the end of March 2009.

This would mean not only lower prices but also a decline in volume growth for cement manufacturers. The only respite for cement companies will come from lower coal prices, which have fallen from $200 levels to about $120. But due to long term purchases, the benefit of lower coal prices will come only in the March 2009 quarter.

In the September quarter, ACC’s standalone operating profit margin declined by 240 basis points YoY to 24.3 per cent because of a rise in power and fuel costs. Operating profit declined by two per cent to Rs 438 crore. With reducing coal supplies from government companies, cement makers have to rely on open market purchases and imported coal, both of which are more expensive. Thus, ACC’s power and fuel costs increased by 380 basis points YoY as a percentage of sales. The net profit was flat at Rs 283.4 crore.

ACC’s top line growth was also subdued at just 7.5 per cent as realisations were up just 3.5 per cent and volumes went up 3.8 per cent. On a consolidated basis, sales grew 13.5 per cent, while operating margin declined 470 basis points to 22.1 per cent. Demand is slowing in ACC’s major markets — north and central India, which account for about 45 per cent of its volumes. As of now, prices have remained more or less stable but according to analysts, prices are likely to start falling as demand slows.