ACC’s rising valuations may have hit a wall
Higher sales volumes helped limit the decline in ACC's Ebitda by about 11% to `370 crore
ACC Ltd’s March quarter results go perfectly with the expected scenario for the cement industry. Cement firms were to benefit from better demand, helped by a low base last year during the same quarter. However, those gains were likely to be negated by lower prices, eventually affecting profits.
ACC’s shares have done well this year but that raises the question of whether it can hold on to those gains.
The firm saw 9% year-on-year volume growth last quarter. In the March 2015 quarter, cement volume declined 10%. Realizations fell about 8%. Revenue growth, as a result, was up by a mere 1.5% to ₹ 2,927 crore. That compares with 5% growth seen at rival UltraTech Cement Ltd. ACC’s Ebitda per tonne declined by about 22% over a year ago to ₹ 539, according to Ankur Kulshrestha, an analyst at HDFC Securities Institutional Research.
But higher sales volumes helped limit the decline in ACC’s Ebitda by about 11% to ₹ 370 crore. Ebitda, or earnings before interest, taxes, depreciation and amortization, is a measure of profitability.
ACC also benefited from a more optimal fuel mix through higher usage of petcoke. Also, its ready-mix concrete business, which accounts for a much smaller portion of revenues and profits, performed well. But that couldn’t stop the company’s overall pre-tax and exceptional item earnings from declining by a third to ₹ 322 crore.
What of the stock? ACC’s shares closed marginally higher on Thursday, a day when the benchmark Sensex declined 1.8%. This year, after touching a low of ₹ 1,191 (closing price) on 29 February, the share price has increased by one-fifth so far. Expectations of a demand recovery in the industry may have contributed but investors could well be unusually optimistic.
For one, it’s worth noting that savings from fuel may not be exceptional in the near future. Secondly, investors would have to watch to what extent the turnaround in the sector is sustainable and how much it will help pricing power. Valuations too are steep, reckon some analysts.
As Kulshrestha of HDFC Securities points out, while ACC is the cheapest large cement company at a capacity multiple of $115 per tonne at Thursday’s closing price, given lack of major growth triggers (despite capacity addition of ~3.5 mtpa in the east) and continued low profitability, it does not justify any higher multiples. Capacity multiple is a standard measure of valuation for cement companies arrived at by dividing EV (enterprise value) by total capacity of a company. “In any case, it remains expensive on earnings trading at 13.7 times and 9.2 times for CY2016 and CY2017 EV/Ebitda, respectively," he added. ACC’s fiscal year is from January to December.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!