ACC lags peers on valuations, volumes amid capacity issues
ACC may reap the benefits of its expansion only after CY22. Until then, a further market share loss is feared
The flat trend in volumes at cement major ACC Ltd was disappointing, especially as cement demand is showing signs of recovering. In the December quarter, ACC’s volumes fell 0.6% year-on-year (y-o-y) to 7.7 million tonnes. This shows significant underperformance to the industry’s estimated growth rate of 7%. UltraTech Cement Ltd and Shree Cement Ltd posted double-digit volume growth of 14% and 15%, on a y-o-y basis respectively, in the December quarter.
ACC has hit a capacity constraint, which has led to the poor volume growth. In a post-earnings conference call, the management said capacity utilization is around 85%. As such, ACC is expanding capacities in east and central India.
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The management said its 1.4 million tonne per annum (mtpa) unit in Sindri, Jharkhand, is running well now. Also, clinker capacity of 3mtpa at Ametha, Madhya Pradesh, would be commissioned in June 2022. Further, its waste heat recovery system at Jamul and Kymore in Madhya Pradesh are slated to be commissioned in 12 months. The management said that it aims to add a total of 6.2mtpa cement capacity in 2022.
In short, the overhang of capacity constraint is short-term in nature. Still, analysts see ACC reaping the benefits of these expansions only after calendar year 2022. Until then, a further market share loss for the company is feared.
“With the spectre of the Competition Commission of India hanging on the head of the sector, cement prices won’t improve meaningfully in a hurry. So, the focus of investors would shift from realisations growth to volumes. The spree of capacity expansions announced by ACC’s competitors indicates that the chase for volume growth would get more aggressive. These capacities have to meet their scheduled deadline, otherwise market share loss would further widen the valuation gap between ACC and peers," an analyst with a domestic brokerage firm said, requesting anonymity.
On the valuation front, the ACC stock is trading a discount to peers. Bloomberg data shows that ACC is trading at an EV/Ebitda of 12 times. EV stands for enterprise value. Ebitda is short for earnings before interest, taxes, depreciation and amortisation. On an EV/Ebitda basis, Shree Cement and UltraTech are trading at multiples of 25 times and 18 times, respectively.
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