Analysts prefer UltraTech over ACC, Ambuja

In the near term though, with demand yet to recover significantly, the top 3 cement stocks might underperform broader markets

The performance of leading cement majors — ACC, Ambuja Cement and UltraTech — during the December 2012 quarter bore the brunt of demand slowdown. While costs increased due to rise in freight rates, realisations declined sequentially as the festive season, followed by severe cold conditions in the north, impacted demand. Average cement prices at Rs 289 a bag in the December 2012 quarter were 3.7 per cent lower than Rs 300 a bag in the September quarter. With profitability declining, share prices of the three companies have seen sharp corrections on the bourses.

Though demand is still to see any meaningful recovery, leading to elevated concerns, UltraTech is seen as a leading beneficiary of any demand surge, as it is shortly expected to see new capacity additions. The company, which has a balanced presence across the country, was also able to maintain profitability in the lean December quarter, in which ACC and Ambuja saw huge impact on margins. Valuations are also relatively reasonable. At current levels, ACC and Ambuja are trading at enterprise value/tonne of around $128 and $179, based on estimated CY14 capacities, while UltraTech is at around $136 based on estimated FY15 capacities.

Subdued profitability in December quarter
ACC’s revenue grew 24 per cent year-on-year (y-o-y) and 27 per cent sequentially, driven primarily by the amalgamation of the ready-mix concrete (RMC) business in the quarter. Excluding RMC, revenue growth came at a meagre three per cent y-o-y and 5.3 per cent sequentially.

  Since RMC earns lower margins, it had little impact on profitability. ACC’s profits were largely hurt by rising costs and lower realisations. Ambuja Cement’s profitability was also impacted. Being a regional player, the sequential decline in realisations at 5.9 per cent was much higher than the 2.8 per cent seen by ACC. The earnings before interest, depreciation, tax and amortisation (Ebitda) margin at 18.5 per cent was much less than the 26.10 per cent of the September quarter.

Comparatively, UltraTech reported an Ebitda margin of 21.1 per cent, slightly lower than 21.4 per cent in the quarter-ended September. It is for these reasons that ACC and Ambuja stocks corrected sharply on Friday post-results (Ambuja down five per cent and ACC three per cent) and slipped further on Monday. Ravi Sodah of Elara Capital, though observes, the last quarter of the financial year is the weakest always for the two Holcim group companies, which make higher provisions, and thereby disappointed the markets more than expectations.

Demand still soft, hurting valuations
The soft demand in the December quarter has not significantly reversed in the current quarter as yet. This is a crucial period for the cement industry as historically demand picks up fast at this time. This has added to the markets’ concerns and is exerting pressure on the stock performance.

The Street is awaiting a surge in demand to support realisations and, in turn, take care of increasing costs. The good part is that cement prices have inched up four to five per cent lately in some regions, which provides some relief.

While analysts remain unsure of the timing of demand recovery, Sodah of Elara Capital adds that in the medium term, demand should gain momentum, as the approaching general elections will lead to a boost in government spending.

The current environment has seen share prices correct, thereby, significantly lowering the premiums that cement stocks were enjoying.

Though analysts feel that as we enter FY14 and the stocks start discounting one-year forward valuations, they will again start looking attractive, the demand pick-up remains the key factor (given north India is still seeing low demand) for a reversal in sentiments.

Capacity additions to benefit UltraTech
In the hope of demand reviving, the companies are building capacities to provide for volume growth in the medium to long term. The largest beneficiary from capacity expansions is expected to be UltraTech, likely to commission its 6.6 million tonnes per annum (mtpa) clinker capacity by the June 2013 quarter. Further expansions will increase its capacity by a total of 10.2 mtpa by mid-FY14, from slightly over 52 mtpa currently.

Ambuja has added 0.6 mtpa capacity in Chhattisgarh recently, taking total capacity to 27.5 mtpa. In the east, it is adding 0.8 mt grinding capacity, while the new bulk terminal of one mt near Mangalore will increase its footprint in the south during 2013.  Ambuja still will remain predominantly a regional player and is seen as the second largest gainer of revival in demand.