If you are surprised at our selection of the cement-maker Associated Cement Companies Ltd. (ACC), one-third of which is owned by world’s second largest cement company Holcim, in this section of company watch, just look at the earning numbers posted by the company. India's largest cement-maker, whose capacity is 20 million tonnes per annum, has almost trebled its quarterly profit for the quarter ended June 2006, beating the street expectations. Its net profit rose 192% to about $87 million (Rs. 4.06 billion) for the second-quarter ended June 2006, from about $30 million or Rs. 1.39 billion (restated to $30.4 million or Rs. 1.42 billion due to business restructuring) in the same quarter a year ago. Its total revenue increased 26.8% to about $317 million (Rs. 14.78 billion) from the restated revenue of about $250 million (Rs. 11.65 billion) in the second quarter of year 2005. Market analysts had predicted the net profit in the range of $56 million to $57 million (Rs. 2.60 billion to Rs. 2.65 billion) on sales in the range of $290 million to $300 million (Rs. 13.50 billion to Rs. 14 billion).

Even if we discount the one-time gain of $33 million (Rs. 1.54 billion) from sale of land and other investments, the quarterly results are really impressive. Although the results are not strictly comparable year-on-year due to the one-off income and business restructuring, the growth is quite healthy.

The above-mentioned impressive figures of ACC are primarily due to a sharp rise in price realisations and cost control. Cement prices in India have been increasing on regular intervals since the beginning of year 2005. The current retail prices of about $5.25 (Rs. 245) per bag of 50 kilograms are almost 20% higher than a year ago. The price rise is expected to continue in this financial year ending March 2007, except for the stagnation in the slack season of monsoon.

To leverage the rising demand, ACC has charted out a plan to invest $114 million for expanding its capacity, including building a 30-megawatt power unit. The company plans to expand annual capacity at its Bargarh facility in eastern Orissa state to 2.14 million tonnes, from 0.96 million tonnes. It will expand its capacity by 1.5 million tonnes in the year 2006 to reach 20.63 million tonnes per annum (tpa), and further add 0.7 million tpa in the year 2007 and 1.18 million tpa in the year 2008.

The cement industry in India has been showing a decent growth rate, which is directly proportional to the overall growth of the Indian economy. For the 6-month period of January-June 2006, India’s cement industry grew by 12.2%, compared to 10.5% growth rate in the same period of previous year.

There are two groups — Holcim and India’s diversified business conglomerate Aditya Birla Group, which occupy the top positions in the industry. While Holcim has stake in ACC and Gujarat Ambuja, Aditya Birla Group has Ultratech Cement Ltd and Grasim Industries Ltd in its fold. Holcim, the one-third owner of ACC, will hold close to 25% stake in Gujarat Ambuja after Ambuja Cement Eastern Ltd gets formally merged with Gujarat Ambuja later this year. Holcim had bought a 14.8% stake in Gujarat Ambuja Cement for $476 million in January 2006 from the promoters and offered to buy another 20% from shareholders at an estimated cost of $560 million.

The combined production of ACC, Gujarat Ambuja and Ambuja Cement Eastern was 2.96 million tonnes in the month of June 2006, compared to 2.73 million tonnes in the same month last year, showing a growth of 8.4%. On the other hand, the combined production of the Aditya Birla Group was 2.42 million tonnes in June 2006 against 2.28 million tonnes in June 2005, showing a growth of 6.1%.

India’s 158 million tonne cement industry is the second largest in the world after China. With the sharp rise in demand, the industry is going through expansion with about 40 million tonne capacity in the pipeline. ACC and Gujarat Ambuja jointly account for about one fourth of the total production capacity of the Indian cement industry, while the Aditya Birla Group holds about 20% of it.

The market has been speculating about the possible merger of ACC and Gujarat Ambuja, since Holcim acquired the stake in Gujarat Ambuja. The group officials, however, deny any such merger plan.

As the $775 billion economy of India grew 9.3% year-on-year in the quarter ended March 2006, the demand for the cement sector is set to grow at an average rate of 8%-9% in the years to come. The Government of India plans to spend $21.5 billion (Rs. 992 billion) on infrastructure this financial year, which is a big positive for the cement sector. ACC, which has a pan-India presence, will be among the highest beneficiaries of the growth in the sector, with its ongoing expansion plans and captive power capacities.

The performance of ACC in the stock market has also been impressive, as its stock price of Rs. 820 ($18.22) on July 25, 2006 is up 82.2% against the price of Rs. 450.25 ($10) a year ago.