Strong realisation, cost saving lift ACC's Q3 show; sales at year-ago level

The robust Q3 operating performance that was ahead of expectations is driving upgrades in earnings and target prices

ACC’s outstanding performance in the third quarter ended September 30 or Q3 (ACC follows January-December as financial year) surprised most analysts. It was led by better realisation and cost savings, and with expectations that these gains on pricing and profitability will likely sustain, analysts are upgrading their earnings estimates for the cement maker.

Cement sales volume might have been flat at 6.49 million tonnes (MT), but the signs were encouraging as it recovered to year-ago level of 6.44 MT amidst Covid-related headwinds. Q2 had seen a 34 per cent year-on-year (YoY) decline in volume to 4.76 MT, and the Q3 recovery was likely driven by rural demand, feel analyst. ACC also said rural and retail sales led to a comeback in demand (as compared to Q2) and urban demand is yet to recover fully, because of continued Covid cases and local lockdowns.

While volumes were flat, it was the higher realisation that aided the show. Though a pan-India player, ACC derives a majority of sales from central, eastern and southern India. The per 50 kg bag cement prices in central India at Rs 351 improved slightly from Rs 348 a year ago, it saw a decline in the east from Rs 332 last year to Rs 329 in Q3. In the south, it saw sharp improvement at Rs 391 from Rs 345 last year. This lifted ACC’s per tonne realisation to Rs 5,090 (up 3.4 per cent YoY). Higher contribution from premium products also aided average realisation, say analysts.

With superior realisations, net sales at Rs 3,468 crore could match the previous year’s performance despite 43 per cent YoY decline in ready mix volumes.

Apart from the boost from higher prices, operating performance was also aided by significant decline in costs. The synergy benefits of ACC’s merger with Ambuja Cements are now visible as the company attributed 17 per cent decline in raw material cost to efficient supply chain management, source optimization, and operating efficiencies. Power and fuel costs, too, declined 21 per cent YoY due to better air-fuel ratio mix and improved operating efficiencies. Freight and forwarding costs also declined 9 per cent due to warehouse space optimisation, higher direct deliveries, and network efficiencies. Overall, there was a 20 per cent decline in per tonne costs, estimate analysts.

Kunal Shah at YES Securities said ACC delivered a big beat on Ebitda (earnings before interest, taxes, depreciation, and amortization), which was 20 per cent above his estimate, led by higher-than-expected realisation per tonne, lower freight expenses and savings on fixed costs.

Thanks to these factors, operating profit jumped 20 per cent YoY to Rs 671 crore. Ebitda per tonne, according to analysts, stood at Rs 918, much better than the previous year’s Rs 747 and Rs 922 in the June quarter. Thus, profit before tax was up 22 per cent YoY to Rs 541 crore.

While the strong Q3 show in a seasonally weak quarter is expected to drive Street sentiment, it is also likely to lead to earnings upgrades. Binod Modi at Reliance Securities said Ebitda for nine months CY20 at Rs 1,560 crore means that actual CY20 performance will be better than his CY20 estimate, and, therefore, an earnings upgrade will be on the cards.

Analysts at HDFC Securities also expect the company's retail and non-trade sales to pickup as demand recovers, boosting business outlook. “We are also enthused by ACC’s continued surprise on fixed cost controls, which is driving margin expansion.” The brokerage has upped its estimate of consolidated Ebitda by 4-6 per cent and net profit estimate by 4.6-7.4 per cent for CY20-CY22, and has revised its target price for the stock to Rs 1,820.

ACC’s share price was up 1 per cent to Rs 1,579 on Tuesday (results were announced after market hours on Monday) even as the Sensex was up just 0.28 per cent. These gains come on the back of an over 20 per cent rally in less than a month. Yet, ACC trades at a discount to many peers. Analysts say the valuation gap could narrow if ACC is able to scale capacity and gain market share.