ACC's strong operating performance lifts sentiment amid Covid-19 lockdown

Despite the lockdown impacting volumes, lower costs drove earnings and beat expectations

Even as the volume pressure was evident on ACC’s March quarter performance and realisations disappointed, cost control pulled up operating performance. 

With both the operating and net profit ahead of estimates, the ACC stock gained more than 8 per cent on Wednesday.

With the lockdown in progress, cement sales at 6.56 million tonnes (mt) declined 12 per cent year-on-year (YoY) and 16 per cent sequentially, in the March quarter (Q1; company follows January – December accounting year).

Price hikes by cement players at the start of the March quarter pushed realisations up marginally by 0.9 per cent (sequentially), to Rs 4,702 per tonne. However, it was still down 0.3 per cent YoY. “The reported realisation was Rs 70 per tonne lower than our estimates,” said Binod Modi at Reliance Securities. Therefore, net sales at Rs 3,433 crore declined almost 10 per cent YoY.

ACC, however, did well on the cost front. Pet coke and diesel prices have continued softening, thereby leading to lower transportation and energy expenses — the two key components for cement makers.

 

 

Increase in sale of premium cement, as well as cost optimisation, has helped. Thus, earnings before interest, tax, depreciation, and amortisation (Ebitda) at Rs 586 crore grew 10 per cent, beating consensus estimates of Rs 525 crore.

Consequently, the net profit of Rs 323 crore was also better than estimates of Rs 315 crore.

Though variable costs (energy and transportation costs) are expected to remain soft, ACC aims to keep a tight control on fixed costs too. However, concerns on volume growth being hit by the pandemic continue, and hence realisations may soften.

With the peak construction season getting affected, analysts expect a recovery in construction services only in the December quarter.

For ACC, however, its cheap valuation should provide comfort. Analysts at Motilal Oswal Financial Services say it is trading at a 35-55 per cent discount to peers such as Shree Cement, UltraTech and 

Ramco Cements, and such a large valuation discount is excessive.

Having commissioned its capacity in East India, ACC has arrested its market share losses since CY17, and should continue to grow in line with the market. 

Further, expansions should also come on stream by the end of the year, and the proportion of inefficient capacities should decline.

The company has a strong balance sheet and is well placed to withstand any extended disruption, while falling costs may offset some impact on earnings due to the disruption, say analysts.

Target prices of Motilal Oswal, HDFC Securities, and Reliance Securities range from Rs 1,310 and Rs 1,440, for the stock trading at Rs 1,207.