ACC's strong operating performance in Q2 could lift sentiment

Improving operating profit despite rising costs should push up Street's confidence

ACC’s performance for the second quarter ended June 2017 (Q2) was above expectations on the profitability front. ACC follows January-December financial year. Cement sales volume at 6.74 million tonnes (MT) grew 10.1 per cent year-on-year and was better than 6.6 MT in the previous quarter. This was partly anticipated by analysts, in light of the completion of ACC’s capacity expansion at Jamul in Chhattisgarh. However, the Street’s concerns on rising costs in the backdrop of higher coal and pet coke price, seem to be getting addressed. 

In the June quarter, ACC’s power and fuel costs surged 31 per cent, while freight costs jumped 34 per cent over the year-ago period. However, operating Ebitda (earnings before interest, tax, depreciation and amortisation) at Rs 637 crore was still up by an impressive 38 per cent year-on-year, and way ahead of Bloomberg consensus estimate of Rs 515.5 crore.

On a per-tonne basis, too, Ebitda increased to Rs 736, growing 8.6 per cent, according to analysts at ICICI Securities, and was better than the brokerage’s estimate of Rs 706. 

ACC said improved productivity and operating efficiencies, including raw material and fuel mix optimisation on a sustainable basis, have helped mitigate the adverse impact of rising raw material and fuel prices. 

This strong operating performance should improve the Street’s confidence on ACC sustaining profitability.

During the quarter, average cement prices for a 50kg bag had improved to Rs 295, against Rs 288 in the previous quarter, led by price hikes since April. But, these were still lower than the average price of Rs 300 seen in the year-ago quarter. ACC, however, has witnessed a 6.2 per cent year-on-year increase in realisation at Rs 4,915/tonne according to analysts, which is again commendable.

Better volumes and realisations, thus, helped sales grow 17.8 per cent year-on-year to Rs 3,329 crore. Though the same was largely in line with Bloomberg estimate of Rs 3,309 crore, better operating performance saw net profit growing 32.6 per cent year-on-year to Rs 326 crore, and coming much better than the Street expectations of Rs 274 crore. This was despite tax expenses almost doubling to Rs 155.6 crore against Rs 83 crore in the year-ago quarter.

Boost in profitability and improving volumes should lift the Street sentiments further, even though the stock has surged sharply in the recent past. It scaled to its all-time intra-day high of Rs 1,778.75 on Monday, before closing at Rs 1,751.25. The results were declared after-market hours.

At the current levels, it is trading at replacement cost of $130-145 per tonne based on CY2018 capacities, according to analysts’ estimates, which is at a significant discount to many peers. Though monsoon could have some near-term impact on cement demand, the demand is expected to improve thereafter. Meanwhile, progress on the ACC-Ambuja Cements merger could add to the sentiment.