Investors’ sentiment towards the ACC Ltd stock turned bitter following its dismal March quarter earnings. The stock fell nearly 5% intraday on the NSE on Tuesday. Also, it is down almost 9% from its 52-week high of Rs1,723.40, which it touched earlier this month.

Given company-specific capacity constraints, expectations on volume growth weren’t high. Volumes grew 5% year-on-year (y-o-y) in the March quarter to 7.5 million tonnes. While this is in line with estimates, it is lower than the industry growth rate of 8-10%.

But the bigger disappointments were poor realisations growth in ACC’s key eastern market and higher operating costs.

Realisation growth was lower than estimates as ACC sold higher volumes in the east, where prices were muted during the quarter. ACC highlighted that the region witnessed double-digit growth, implying low single-digit growth in other markets. Higher lead distance, lower supply of linkage coal, and an increased mix of domestic petroleum coke pushed the cost per tonne up by 3% y-o-y, analysts said.

A silver lining here is that the company is on track to expand its capacity by 5.9 million tonnes per annum (mtpa) over the next three years. With that, its capacity will increase to 39.3 mtpa from 33.4 mtpa at present. However, till the time this expansion fully materialises, the company is poised to witness some loss of market share.

“ACC has already reached 90% capacity utilization in 1QCY19. We expect the expansion projects to start contributing meaningfully only from 2022E. We have increased our cost assumptions by 1-2% and cut volume by 1-3% for CY2019E-20E, resulting in EPS cut of 4-6% for CY2019E-20E," Kotak Institutional Equities Ltd said in a report on 23 April. EPS stands for earnings per share.

The stock is trading at a one-year forward EV/EBITDA of around 11 times. EV stands for enterprise value and Ebitda is short for earnings before interest, tax, depreciation and amortization. This valuation is expensive, considering the aforementioned issues, and should moderate.

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