ACC disappoints, but there's hope for investors

Declining volumes, cost overruns impact Sept quarter performance

ACC disappointed the Street with its September quarter performance. The expectations were already subdued for the quarter, looking at the muted cement demand and realisations impacted by monsoon. All India cement realisations had been flat, with a 50-kg bag averaging Rs 300, compared to Rs 299 in the June quarter and Rs 296 seen in the year-ago quarter. Also, the Street was factoring in cost escalation in the light of rising coal prices and assuming no major growth in volumes. With the actual performance much below these expectations, it is not surprising the stock fell three per cent on Friday after the results.

ACC’s cement volumes at 5.07 million tonnes (mt) declined 17.2 per cent sequentially and 9.6 per cent year-on-year. Analyst such as those at Motilal Oswal Securities had pegged volumes at 5.33 mt. So, this was a big miss. The per-tonne cement realisation at Rs 4,558 declined marginally compared to Rs 4,618 seen in the year-ago quarter; sequentially, however, it was up 3.2 per cent. Nevertheless, lower volumes led to net sales declining 9.8 per cent year-on-year and 13.9 per cent, sequentially, to Rs 2,473 crore, lower than Rs 2,563 crore estimated by Bloomberg consensus.

The surge in costs added to the disappointment on lower volumes and revenues. Operating cost per tonne for ACC increased by 0.4 per cent year-on-year and 10 per cent sequentially mainly on account of hardening fuel prices. Further, freight cost per tonne also increased, due to spike in diesel prices despite pro-active measures taken by ACC to reduce its lead distance in previous quarters, say analysts. Hence, operating profit at Rs 274 crore (down 12.6 per cent year-on-year), too, came significantly lower than Rs 315 crore estimated by Bloomberg.

  Net profit at Rs 82 crore was down 29 per cent and, thus, lower than the Bloomberg estimates of Rs 145 crore.  Comparatively, its all-India peer UltraTech had also seen cost pressures but was able to maintain its volumes that came flat year-on-year. UltraTech’s operating profit had grown 16 per cent y-o-y.

ACC will have to step up cost efficiency as coal prices are on the rise. The company said that ongoing efforts to enhance operational efficiencies and tightening of operating costs enabled some visible sign of improvement. Thus, the Street will be anticipating more benefits to accrue in coming quarters.

The company is also seeing its capacities ramp-up as new 2.79 mt clinker line and 1.10 mt grinding unit at Chhattisgarh were commissioned during the September quarter and 1.35 mt grinding unit in Jharkhand will also be commissioned by the end of October. Hopefully, these will drive volumes in the coming quarters. If demand picks up and realisations improve, it should lead to better gains for the firm. ACC and Ambuja Cements are also to merge soon and this is being looked at in a positive light, which should also drive cost efficiencies. These events should limit the downside for the stock.