ACC & Ambuja: No concrete gains ahead

The recent stock outperformance, coupled with demand and margin headwinds, suggests the upsides for the two cement majors are capped.

Expectations of a good performance, on the back of pricing discipline, has helped the stocks of major cement players like ACC and Ambuja outperform the Sensex since the start of July. However, valuations are not cheap at the current levels and analysts say there could be pressure on volumes (due to subdued overall demand and price increases) and margins (due to firm costs).

Against this backdrop, and until cement demand picks up visibly, the stocks are unlikely to maintain the outperformance. In fact, if the trend of cement despatches seen in October (the top three players, ACC, Ambuja and UltraTech, reported muted growth) continues, it would reflect adversely on their stocks.
 

GOOD SHOW, OUTLOOK SLUGGISH
In Rs crore	ACC		Ambuja Cements
	Q3CY2011	CY2011E	Q3CY2011	CY2011E
Net sales	2,283	9,322	1,805	8,332
Y-o-Y chg (%)	29.82	12.87	15.4	12.74
Ebitda	317	1,848	312	2,018
Ebitda (%)	13.31	19.82	17.30	24.22
Net profit	159	1,848	171	2,018
Y-o-Y chg (%)	84.60	71.59	12.70	59.75
PE (x)	–

20.01

–

19.19 E: Estimate    Year ending December     Source: Capitaline, Bloomberg, Analyst Reports 

VOLUME, PRICE BOOST FOR ACC
The performance of Holcim group companies, Ambuja Cements and ACC, for the quarter ended September was largely in line with Street estimates. However, ACC managed to outperform Ambuja in terms of volumes, revenue growth and profitability. This has, however, been on the back of a double-digit volume growth posted by ACC over a low base marred by capacity constraints during the January-September 2010 period. In the September 2010 quarter, ACC had seen a decline in volumes as its expansions in Orissa (1.2 mt) and Karnataka (3 mt) got delayed and could stabilise only by the end of that quarter.

Thus, in the September quarter this year, while Ambuja’s sales volumes, at 4.76 mt, were 7.1 per cent higher year-on-year, ACC’s was up 19.1 per cent at 5.69 mt. ACC also benefited on the realisation front, thanks to relatively good presence in South India, where cement prices have remained stable after steep price increases in September 2010. While average cement prices per bag in the country increased from Rs 228 in the September quarter last year to Rs 247 in the quarter this year, those in South increased from Rs 210 to Rs 278, resulting in bigger gains for ACC. Thus, Ambuja’s average net realisations rose 6.4 per cent year-on-year to Rs 3,794 a tonne, while ACC’s rose by 10.3 per cent to Rs 4,039 during the September quarter of this year. With better realisations, ACC was able to absorb the increase in coal and fuel costs, while Ambuja felt more heat and its margins, at 17.3 per cent, were the lowest ever.

OUTLOOK
However, moving forward, ACC will have a level field with Ambuja and other peers. The double-digit volume growth posted by ACC may not be sustained. In fact, data for October 2011 show ACC’s monthly cement despatches were up only 2.6 per cent to 1.97 mt; Ambuja has also reported a muted growth of 1.7 per cent in despatches, while UltraTech’s has fallen 6.8 per cent year-on-year. Realisations for both (ACC and Ambuja), however, may improve, looking at the recent price hikes, but their margins may feel some pressure due to higher coal and freight costs. Apart from the coal price increase undertaken by Coal India this year, the rupee’s depreciation against the dollar has resulted in a rise in imported coal costs. Analysts at Angel broking see the bottom-line for ACC growing at lower 9.5 per cent CAGR over CY10-12 due to cost pressures whereas they estimate the top-line growth of 18.4 per cent during the same period.

Stock valuations are not cheap. Analysts at BRICS observe that Ambuja trades at an enterprise value (EV) per tonne of $165, which is a substantial 44 per cent premium on replacement costs. They add that sector fundamentals remain weak, with oversupply scenario and volatile prices as a result. ACC, on the other hand, according to an ICICI Securities report, trades at an EV per tonne of $138 and $133 for 2011 and 2012 calendar years, respectively, (again a premium on replacement costs). Analysts say, while higher cement prices may sustain (due to pricing discipline and induced by cost pressures), it could lead to lower volumes, given the already slowing economy. The infrastructure demand has not increased substantially yet and housing demand is also slow. It is largely rural demand that is providing some impetus to volumes.

Vineet Hetamasaria, Head of research at PINC, observes that the stock prices have run up sharply and outperformed the broader indices in the last three months, on the belief that higher cement prices would be sustained. However, he adds that lower cement demand leading to lower capacity utilisations moving forward has not been factored in. According to Bloomberg estimates, the consensus one-year share price targets for ACC is Rs 1,078, while it is Rs 138 for Ambuja Cements.