The stock has risen 20 per cent from its lows in June, while the Sensex has lost 2.4 per cent in the period
Even as the cement supply in the country continues to outpace demand, ACC’s performance on the bourses has been remarkable. The stock has risen 20 per cent from the lows of Rs 917 on June 20, 2011, to Rs 1,126 currently, against a 2.4 per cent fall in the Sensex during the same period. This has been largely due to a robust increase in volumes as well as better realisations.
According to analysts, ACC had lagged its peers, as it faced capacity constraints during last year, impacting volumes. Further, sustaining price increases undertaken during last year, especially in South India, and recent increases in the North points to a positive outlook for ACC’s realisations. These have together helped the stock move up, catching on valuations with peers. Going forward, analysts feel prices can be sustained at least till March 2012, as manufacturers will maintain production discipline and construction activities are increasing post-monsoon.
| IMPROVING MARGINS | |||
| CY10 | CY11E | CY12E | |
| Net sales | 8,259 | 9,245 | 10,490 |
| Y-o-Y chg (%) | -2.6 | 11.9 | 13.5 |
| Ebitda | 1,541 | 1,891 | 2,183 |
| Ebitda (%) | 18.7 | 20.5 | 20.8 |
| Net profit | 1,078 | 1,141 | 1,335 |
| Y-o-Y chg (%) | -31.1 | 5.9 | 17.0 |
| EPS (Rs) | 57.4 | 61.0 | 71.0 |
| PE (x) | 19.6 | 18.5 | 15.9 |
| Source: Capitaline, Bloomberg, Analyst reports | |||
On the flip side, Coal India has recently decided to divert e-auctions slated for October to power producers. If the situation continues, cement manufacturers will have to resort to high cost of imported coal. Also, the expected price rises by Coal India, too, can impact the profitability of ACC, looking at its dependence on Coal India for supplies.
Meanwhile, though analysts have neutral view on the sector, they prefer ACC among a few other stocks due to relatively reasonable valuations. At Rs 1,126.40, ACC’s stock trades at an enterprise value per tonne of $130 against $167 for Ambuja Cement and $137 for Ultratech, according to Emkay Global estimates.
VOLUME BOOST
ACC has marked excellent 14 per cent growth in volumes to 17.76 million tonnes (mt) during January-September 2011 — translating into an annualised capacity utilisation of 77 per cent. On a comparable basis, during April-September 2011, ACC volumes at 11.56 mt have marked 15.1 per cent growth annually, compared to 0.2 per cent by Ultratech and one per cent by Ambuja Cement, a group firm, partly aided by a low base.
ACC, facing capacity constraints during last year, had been a laggard in terms of volume growth. It had posted negative growth for first three quarters of 2010, as its brownfield expansions in Orissa (1.2 mt) and Karnataka (3 mt) got delayed and took time to stabilise. Further, post completion of the 3-mt-per-annum clinkering plant in Chanda (Maharashtra), along with the 25-Mw captive power capacity starting contributions, the cement capacity increased to 30.6 mt per annum by the end of 2010. Its captive power capacity increased to 346 Mw. These have led to the growth in volumes seen so far during 2011, and given the availability capacity volumes should continue to rise at a healthy pace.
BETTER REALISATIONS
Along with volumes boost, realisations have also improved. The increase in cement price (ranging from Rs 25-50 for each 50-kg bag) undertaken by players in southern states since September 2010 have sustained. Prior to September 2010, the prices in the southern states had been much below the national average of around Rs 225 a bag (of 50 kg). These have helped ACC post better realisation looking at its good presence in south.
Though overall cement capacity additions in the country have outpaced the demand, by maintaining production discipline cement players have been able to sustain higher prices in rest of India too. ACC saw realisations of Rs 4,052 a tonne (Rs 202.60 per bag) during the April-June quarter, 5.7 per cent higher over the same period last year. Further, during the sluggish September quarter which was marred by monsoon, realisations should come at Rs 3,772 a tonne or Rs 188.60 per bag (up 11.3 per cent year on year), according to Motilal Oswal Research estimates.
Notably, as the monsoon season ended, the last 15-20 days have also seen cement prices going up by Rs 50 per bag in northern states, to an extent due to an increase in costs. Analysts feel while demand in October may take a slump due to the festive season, the coming months should see better demand. They feel though a major boost to demand will only come after large infrastructure projects take off, cement players should be able to keep prices at reasonable levels by maintaining volume discipline.
COAL RISK
Coking coal remains the basic raw material for cement production. While cement manufacturers had been dealing with firm coal prices, a new problem has cropped up for them. ACC procures about 20 per cent of its requirements from e-auctions from Coal India. However, for October 2011, Coal India has decided to offer e-auction quota to power companies facing acute shortage of coal. While cement majors generally keep 30-40 days of coal inventory and for now Coal India has decided for diverting supplies during October only, if the problem persist cement producers will have to shift to high-cost imported coal. According to Emkay Global estimates, if the problem persists for the October-December period, CY2011 EPS of ACC can be negatively impacted by 1.2 per cent. Also, there is likelihood of Coal India going for price hikes considering the wage revisions at the company, which could further impact ACC’s margins.
