ACC’s volume growth not a sign of demand revival
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The ACC Ltd stock was under pressure, down nearly 2% intraday on Friday, in anticipation of muted March quarter earnings, especially on the volumes front. But to the Street’s surprise, the pan-India cement company’s volumes grew 3.77% to 6.6 million tonnes. Could it be that we are finally seeing some green shoots? After all, the cement sector is an excellent proxy for investment demand and for mass job creation in the construction sector.
But let’s not get carried away by ACC’s performance. It’s too early to call this is an indication of demand resumption.
After a dismal January and February, volumes for most cement companies picked up in March, showed recent dealer channel checks by some brokerage firms. This was because some increase was seen in government spending on infrastructure, which happens almost every year in March. Also, on a year-on-year basis, volume growth would look impressive because of the base effect, as March 2016 was dismal.
As far as ACC is concerned, it may see some volume growth in the coming quarters as well, largely aided by capacity expansion; however this kind of sharp growth is unlikely to sustain, cautioned cement analysts. The company commissioned capacity in the eastern region at the Jamul plant in Chhattisgarh. Also, it launched two new products during the March quarter.
It should be noted that the eastern region of India is currently running on overcapacity as a slew of cement makers including UltraTech Cement Ltd, Shree Cement Ltd, JK Lakshmi Cement Ltd and Birla Corp. Ltd have added capacities in fiscal year 2017.
Sharing a similar view, some economists pointed out that even if one sees other key cement companies posting strong volume growth, a three-month performance is not enough to conclude that a sustainable revival in demand is under way.
Since expectations had been that ACC’s volumes would decline, the surprise volume growth is likely to have a positive impact on the stock’s movement next week and a rub-off effect on peers as well. And with that, the market may be bracing for better-than-expected volume growth from other large cement makers like Ambuja Cements Ltd, UltraTech and Shree Cement.
To conclude, cement stocks might rally, but nothing on the ground has really changed for the sector.
Mark to Market writers do not have positions in the companies they have discussed here.