Earnings downgrades pour in for ACC on dismal June quarter margin performance
- But despite the challenges the cement sector is facing, the ACC stock has seen lower decline than the Nifty50, so far in this calendar year. ACC has also done better than peers Ultratech Cement, Ambuja Cements Ltd., and Shree Cement
Pan-India focused cement manufacturer ACC Ltd. reported dismal earnings performance in the June quarter of calendar year 2022 (Q2CY22). The company follows a January to December accounting year.
Considering that the cement industry is battling acute cost pressures, ACC's steep operating margin compression was a key dampener. Total cost on a per tonne basis, rose 23% year-on-year (y-o-y) and 9% sequentially, due to a jump in input costs. Even though realisations improved sequentially and annually in Q2CY22, it was not enough to alleviate margins. Ebitda margin contracted by around 1,300 basis points (bps) y-o-y and around 480bps sequentially. Ebitda is short for earnings before interest tax, depreciation and amortization. Further, the Ebitda/tonne slid to a multi-year low.
"ACC narrowed the gap on margins with peers over last couple of years on back of visible reduction in manufacturing costs and higher operational efficiencies under program ‘Parvat’, complemented by rationalisation of logistic costs through Master supply agreement (MSA) with Ambuja cement," said analysts at Prabhudas Lilladher. However, the scope for further reduction in cost remains limited as majority of levers are already captured in current cost dynamics, except reduction in power costs on account of upcoming waste heat recovery plants, it added.
Although sales volume grew 10.5% year-on-year to 7.6 million tonne, ahead of analysts' estimates, it was aided by the low base of last year, when sales were nit because of the second wave of the pandemic.
Post the cement maker's Q2CY22 earnings, many brokerages have downgraded the company's earnings estimates for CY22 and CY23. Also, they have trimmed the stock's rating.
Interestingly, despite the challenges the cement sector is facing, the ACC stock has seen lower decline than the Nifty50, so far in this calendar year. ACC has also done better than peers Ultratech Cement Ltd., Ambuja Cements Ltd. and Shree Cement Ltd. This can be attributed to the fact that acquisition by the Adani Group will be followed by an open offer.
Historically, ACC has been a laggard in capacity additions compared to other relevant players in the industry. "During FY08-22, ACC’s grinding capacity reported a CAGR of 4% v/s 9-18% capacity CAGR of other major players," said analysts at Motilal Oswal Financial Services Ltd. CAGR is short for compounded annual growth rate. So, growth plans and cost saving strategies by the new management will be key triggers for stock performance, added the domestic brokerage house.
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