Volume growth recovers at ACC, but questions remain
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Volumes at ACC Ltd recovered during the December quarter, notching up a growth of 4%, compared with a 10% decline in the September quarter. That suggests increased demand in the October-December period, seasonally a robust time for cement demand. Moreover, a lower base in the same period last year also helped.
For the full year 2015, the company’s volumes are still down 2.4%, compared with the industry growth of 3-4%, say analysts.
ACC’s volume growth has been behind industry as it hasn’t added capacity and hence lost market share to larger companies like UltraTech Cement Ltd and regional firms.
Further weak demand in rural India impacted ACC more as the company sells more in these markets, pointed out Nitin Bhasin of Ambit Capital Ltd.
Ebitda (earnings before interest, taxes, depreciation and amortization) per tonne grew 7% year-on-year (on a very low base of last year) to Rs.469 per tonne.
This was higher than analysts’ estimates and was boosted by lower-than-expected power and fuel costs. Power and fuel costs per tonne have fallen around 11% compared with a year ago because of a decline in energy costs.
However, ACC could have benefited more if it was using pet-coke. Most of its cement peers are using pet-coke, which is linked to crude oil, while ACC continues to use coal linkages.
Realizations continued to decline, down over 2% compared with a year ago, mainly because of pricing pressure in the north; although prices in the south continued to remain firm. As a result, operating profit recovered and was up 11% year-on-year. Overall net sales grew 3% to Rs.2,846 crore. Net profit was down 68% to Rs.103 crore compared with a year ago due to tax credit of Rs.181 crore in the same period last year.
ACC shares are trading at low valuations of 12.4 times one-year forward EV/Ebitda (enterprise value to Ebitda) multiple.
In short, despite the recovery in its December quarter earnings, there are doubts whether it will be sustained because of ACC’s high capacity utilization and legacy factors such as use of coal linkages, which may continue to limit earnings growth.
The writer does not own shares in the above-mentioned companies.