ACC beats the Street, but beware the exuberance
Cement maker ACC has exceeded analysts’ estimates not only on volumes, but on other parameters such as profit and operating margins as well
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In anticipation of strong June quarter earnings, especially on the volume front, the ACC Ltd stock hit a fresh lifetime high of Rs1,778.75 intraday on BSE on Monday before succumbing to a bout of profit-taking. The cement maker exceeded analysts’ estimates not only on volumes, but on other parameters like profit and operating margins as well.
Consolidated net profit rose 32.6% year-on-year to Rs326 crore aided by higher operating income and revenue. Despite elevated fuel and freight costs, operating margin of the pan-India company surged sharply to 18.4% aided by better realizations.
Dealer channel check reports of various brokerage firms showed that average cement prices across the country rose during the start of the quarter, but declined in the month of June.
What also came as a boost to margins was good traction witnessed for its two brands—ACC Suraksha and ACC High Performance Cement—that were launched in the previous quarter.
Cement sales volume grew 10.1% year-on-year to 6.74 million tonnes. Though better than Street expectations, it should be noted that akin to the previous quarter, growth is largely driven by capacity expansion in the eastern region at the Jamul plant in Chhattisgarh.
Analysts say that nearly 30% of the company’s total sales is contributed by the eastern region, where prices jumped by around 15% during the June quarter.
Some of the volume growth may have come from higher demand due to government spending on infrastructure activities in certain pockets. However, a significant revival in cement demand across the country hasn’t happened yet, they added.
But the market seems to be ignoring this concern. The ACC stock has rallied more than 30% year-to-date, outperforming the benchmark Sensex that rose 20% during the same period.
Also, operating margin is unlikely to sustain at this level simply because the September quarter is a weak one for the sector where prices tend to remain under pressure, thus hurting realizations.
Hence the exuberance in the ACC stock doesn’t really seem justified. Not only that, on the valuation front too, the stock is trading at a one-year forward price-to-earnings multiple of 28 times, making it an expensive bet.
Meanwhile, the ACC stock would be on market participants’ radar for its potential merger with Ambuja Cements Ltd.