ACC: Improving earnings visibility boosts confidence on the Street

Rising cement prices, lower fuel prices expected to add Rs 200-300 per tonne to operating profit of the company

Major cement stocks have gained recently on the back of improving prices of construction material. ACC, however, has outperformed peers, with the stock rising almost 9 per cent in the last five trading sessions versus up to 5 per cent rise in stocks of UltraTech Cement, Ambuja Cements, and Shree Cement.

The confidence of ACC’s management, in terms of improving operating profit, coupled with an attractive stock valuation (10 times its estimated EV/Ebitda, against 15-16 times that of UltraTech and Ambuja), has turned investors more bullish towards ACC. EV/Ebitda denotes enterprise value to earnings before interest, tax, depreciation and amortisation.

The cement sector had been reeling from subdued pricing over the past couple of quarters. ACC’s sale realisation from its cement business dipped Rs 938 per tonne, or 5 per cent, in calendar year (CY) 2018 against a year ago. ACC follows a January-December accounting year. However, things are turning the corner.

According to Reliance Securities, the all-India average cement prices recovered 6 per cent, or Rs 15-20 per 50 kg bag, to Rs 310-315 a bag in February 2019, month-on-month.

With a revival in pricing, and expectations of lower fuel prices, the management expects Rs 200-300 additional Ebitda per tonne in forthcoming quarters. Amid high inventory, low crude oil prices were not fully reflected in fuel costs till December.

However, the favourable impact will flow from the on-going quarter. Freight, as well as power and fuel expenses, accounted for over 45 per cent of ACC’s overall net operating income in CY2018. However, higher landed cost of slag, amid logistic hurdles and supply issues, will cap Ebitda gains.

Yet, Reliance Securities analyst Binod Modi expects ACC’s Ebitda per tonne to rise by over 13 per cent over CY2018-20. This will be supported further by Rs 30-40 per tonne savings in employee costs and focus on premium products.

Earnings improvement will further stem from a likely pick-up in high profitable trade segment volumes, which account for 75-80 per cent of ACC’s overall volumes.

Since the December quarter, strong traction has been observed in affordable housing and rural infrastructure activities, which should help the trade segment, says an analyst with a domestic brokerage.

Overall, the Street estimates ACC’s earnings to grow at a compound annual growth rate of 19 per cent over CY18-20, higher than the 17 per cent achieved during CY16-18.