ACC Ltd’s robust September quarter results did nothing to tickle investor sentiment. The country’s oldest cement conglomerate reported 32% growth in consolidated revenue to 2,383 crore from the year-ago period on the heels of higher sales volume and cement price.

ACC Ltd. cement plant. Photo: Bloomberg.

Analysts had expected robust volume growth for ACC due to its expanded capacity and a gain in market share. But, perhaps the management note clouded the already gloomy outlook for the sector. It said, “A pickup in demand for cement is likely after the monsoons, with a similar impact on our despatches in the coming months; though we don’t expect it to be very robust in view of concerns about a slowdown in economic growth."

A sequential quarterly comparison reiterates the truth of that statement. Volumes fell 4% from the June quarter and realizations dipped by 6.8%, higher than the fall in cement prices of around 4.5%. Analysts feel lower operating leverage also ate into profitability as rising costs hit margins.


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Losing out (PDF)

Quarterly performance (PDF)


The biggest hit was in the power and fuel costs, which as a percentage of sales increased by about 200 basis points from the June quarter and 360 basis points from a year ago. One basis point is one-hundredth of a percentage point.

The company said the supply of domestic coal—its principal energy source—has been grim, while prices of even slag and fly ash (raw materials) have risen over the last six months. Employee costs, too, were higher.

As a result, operating profit (excluding the other operating income), although 31% higher from the year-ago period, fell significantly by almost half compared with that in the June quarter, reflecting spiralling costs. Operating profit margin at around 10.3% was accordingly less than half that registered in the June quarter.

With infrastructure projects in limbo and companies squeezed by higher costs and interest rates, the outlook for cement firms looks bleak.

ACC’s results mirrored that of its competitor, UltraTech Cement Ltd, posted a week ago. The year-on-year performance for both the leading companies looks impressive, as it is measured on a low base. However, this effect will reduce from the December quarter.

That said, UltraTech fared a tad better than ACC in terms of profitability as it has higher exposure to the western and southern parts of the country, where demand and cement prices are more stable.

Although the stocks of the three cement firms—ACC, UltraTech and Ambuja Cements Ltd—have outperformed the benchmark Sensex of BSE in the past three months, as cement prices steadily rose, ACC’s shares have fared marginally better.

The key to future improvement in valuations lies in an uptick in demand and sustained prices.

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