Holcim Ltd’s cement companies ACC Ltd and Ambuja Cements Ltd shares may underperform large cap peers such as UltraTech Cement Ltd on the back of muted volume growth because of a lack of capacities, although economic recovery is gathering steam and construction activity is expected to rebound.

Nirmal Bang Research, in a note dated 31 October, slashed the volume growth forecast for 2015 by 195 basis points (bps) to 8.7% for ACC and by 35 bps to 9.4% for Ambuja Cements. One basis point is one-hundredth of a percentage point. The volume growth visibility is weak for ACC and Ambuja Cements, compared with UltraTech which is expected to clock double digit volume growth, said analysts.

ACC and Ambuja Cements have not added any capacity in the past few years after getting acquired by Swiss cement maker Holcim. ACC’s capacity utilization was around 75% in the September quarter, with plants in some regions running at full capacity. ACC and Ambuja will commission capacity of 4 million tonnes (mt) and 6 mt each by the end of next year only, said Sanjeev Kumar Singh, an analyst from Emkay Global Financial Services Ltd.

In the September quarter, volume growth was flat at around 1.6% for ACC due to the lack of capacity. For Ambuja Cements as well, volume declined 1% because of demand pressure in the western region, Singh said. Realizations per tonne increased by 8% for ACC and by 10% for Ambuja Cements which buoyed their operating performance. A low base helped as this time last year cement prices were depressed. As a result, Ebitda (earnings before interest, taxes, depreciation and amortization) per tonne for ACC and Ambuja Cements rose by around 34% and 51%, respectively, in the September quarter.

Cost pressures continued as power, fuel and freight costs increased by around 12% each for both the companies. Increase in e-auction for coal, which was costlier, also weighed on energy costs. But rising costs did not have much impact on margins due to sharp price increases taken during the quarter. Operating margin expanded by 216 bps to 11.2% for ACC and by 468 bps to 17.3% for Ambuja Cements.

It was not surprising that net profit for ACC rose 62% to 193 crore and for Ambuja Cements it was up 44% to 239 crore.

ACC and Ambuja Cements shares are up 32% and 21%, respectively, in the past one year, underperforming other cement makers because of the overhang of large cash outgo from Ambuja Cements’ balance sheet for acquiring ACC.

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