Realisation gains for ACC, Ambuja

While Ebitda margins improved in September quarter, led by higher prices, concerns on volume growth continue

ACC’s performance for the year's third quarter ending September (Q3) was driven by better realisations and was in line with the Street’s expectations.

However, volume growth was lower than the expectation, while cost pressures continue. Declining coal prices had increased the expectations on power and fuel costs declining for cement companies. Analysts feel higher e-auction coal prices and the lagged effect of higher petcoke prices might have been the reason for the cost pressures continuing.

There might be some respite on this for the company but on volume growth, the concerns remain. Group firm Ambuja Cements, also majority shareholder of ACC, disappointed on the volume front, too. These fell 1.1 per cent year-on-year to 4.67 million tonnes in Q3 (ACC and Ambuja both follow a January-December financial year).

Its overall numbers were also short of expectations. As volumes are not expected to rise sharply in the near term and with fair valuations, most analysts see limited upside from the current levels for the two stocks.

  ACC’s sales volumes at 5.62 mt in the September was only 1.4 per cent higher than the same period last year. UltraTech Cement, on the other hand, saw 12 per cent growth in volume. While UltraTech continues expanding capacities through both the organic and inorganic routes, which is driving its volume growth, ACC’s five-mtpa capacity expansion at Jamul in Chhattisgarh will accrue benefits only in 2016.

Analysts, however, had still anticipated around three per cent volume growth for ACC and, hence, a lower growth did disappoint. Notably, volume growth for the first nine months of calendar year 2014 was only about two per cent.

ACC’s Q3 revenue, however, grew 9.4 per cent to Rs 2,742 crore, largely in line with Bloomberg consensus estimates of Rs 2,774 crore. These were driven primarily by higher realisation. The all-India average cement price per 50-kg bag was Rs 320, an increase of 7.9 per cent over the Rs 297 in the year-ago quarter. Better realisations also drove the Ebitda (earnings before interest, taxes, depreciation and amortisation) margin, which improved 242 basis points (bps) to 13.8 per cent. Net profit was Rs 193 crore, almost in line with the expectation.

Ambuja Cements’ Ebitda margin also surged, by 454 bps to 18 per cent. However, revenue, Ebitda and profits were below expectation. Revenue was 9.2 per cent at Rs 2,188 crore, much lower than the estimate of Rs 2,311 crore. Net profit at Rs 239 crore also missed the estimate of Rs 257 crore. Though better realisations (led by higher prices) boosted the margin, Ebitda at Rs 393 crore was marginally lower than the estimate of Rs 398 crore.

For Ambuja, too, volume growth concerns remain, given that other companies in the region have expanded capacities ahead of its planned expansion. While looking at the rich valuations (replacement cost of about $160 a tonne on estimated CY15 capacity), analysts remain neutral and those at Ambit, bearish. They observe Ambuja’s reluctance to re-invest for capacity expansion at a time when regional players aggressively built scale has led to market share erosion in key segments such as north and west India. It has lost its leadership position to Shree Cement in north India.

The company’s market share dropped to 8.7 per cent in CY13 versus 10.1 per cent in CY07. While they have a target price of Rs 202, the consensus target price from analysts polled on Bloomberg in October is Rs 215, indicating limited upside for the stock, already trading at Rs 223.

For ACC, increasing realisations and expected improvement in demand are likely to keep driving revenues and profits. However, the Street will be looking at the volume growth trend. Analysts at Ambit had observed that lack of capacity expansions and high retail exposure will restrict ACC’s volume growth, especially in an infrastructure spending-driven cement demand recovery. They have built in a volume growth of six per cent for CY14 and eight per cent for CY15.

While their target price stands much lower at Rs 1,181, other more optimistic analysts as those at Karvy have one of Rs 1,723, valuing the stock at replacement costs of $145 per mt (based on estimated capacity in CY15), implying 11.5 times the estimated CY15 Ebitda. The consensus target price of Rs 1,533 from analysts polled on Bloomberg, however, indicates a limited upside for the stock, trading at Rs 1,493. For both companies, if they are able to perk their volumes, Investor sentiment could revive.