Graphic: Santosh Sharma/Mint
Graphic: Santosh Sharma/Mint

ACC: Volumes, realizations feel the heat of poor demand environment

  • Given the low cement capacity utilization levels, meaningful demand recovery is a tall order in the near term
  • Operating margins in the third quarter were aided by lower cost of raw materials

ACC Ltd reported lacklustre results for the September quarter. Consolidated net profit and revenue improved from the year earlier, thanks to premium products, but cement sales fell.

In a seasonally weak quarter, cement sales fell 2% year-on-year to 6.44 million tonnes. But realizations rose 3.9% from a year ago as the sale of premium products increased as a proportion of overall sales. Importantly, realizations fell more than 5% sequentially.

ACC, a pan-India focused cement producer, has higher exposure to the south and east regions. Cement prices have been in a correction mode across India especially after May. But the decline has been sharper in the south.

Operating margins in the third quarter were aided by lower cost of raw materials. Power and fuel costs as well as freight expenses remained high as the company is said to be sitting on some high-cost inventory.

However, from the next quarter onwards, cement producers including ACC are expected to see more benefits from easing prices of petroleum coke and coal.

“Input costs of raw materials were lower year-on-year supported by supply chain efficiency. Fixed costs as well as selling, general and administrative expenses (SG&A) continued to be lower on year-on-year basis," said ACC in a statement.

Also, since the company has a comparatively higher share of railways in its transportation mix, it could see additional savings from the recent busy season surcharge waiver by Indian Railways for transportation of cement.

For investors in this sector, there isn’t much to look forward to, unless demand revives significantly. Given the low capacity utilization levels, meaningful demand recovery is a tall task in the near term. Thus, prices are likely to remain subdued, keeping realizations growth muted. And the market does acknowledge that.

From its 52-week high of 1,769.05 in May this year, the ACC stock has given up nearly 15% in value. The stock closed at 1,498.05 on the National Stock Exchange on Tuesday.

On the valuation front, the ACC stock trades at a one-year forward EV/Ebitda of 9.25 times. EV stands for enterprise value. Ebitda is earnings before interest, tax, depreciation and amortization. It trades at a discount to peers such as UltraTech Cement Ltd and Shree Cement Ltd, who also have a pan-India presence.

Analysts attribute this gap in valuations to ACC’s capacity constraints. In its statement, the company said it is implementing projects that will add capacity in the markets of Uttar Pradesh, Madhya Pradesh, Bihar, Jharkhand and West Bengal.

However, analysts say this would only help ACC in the long term as the key triggers of an improvement in demand as well as prices remain currently.

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