Resumption of limestone mining positive for ACC

It will help clinker production and cut dependence on third parties

The resumption of mining in Odisha is good news for ACC as it comes at a time when the cement sector continues to face challenges. Cement prices have weakened as demand remains muted. Resumption of mining, which will lead to the start of the clinker plant, will result in operational benefits for ACC. Limestone is among the key inputs used in making cement.

Pursuant to closure notices served by respective states to mining units, ACC's Bargarh and Chaibasa operations were suspended on October 10, 2014. While Chaibasa mines started operations sometime ago, the resumption of Bargarh mines from June 17 is also a big positive. This will result in the company resuming production at its 1.25 million tonnes per annum clinker plant, which constitutes six per cent of ACC's total clinker capacity. Analysts see some improvement in overall volumes besides major benefit on the cost front. Analysts at Edelweiss say the resumption will help lower cost by Rs 50 a tonne. They also say the restart is on expected lines and, hence, they maintain their 'buy' rating on the stock with a price target of Rs 1,760.

  The news also provides a breather as fresh linkage auctions are likely to significantly push up energy costs for ACC, which depends more on linkage with Coal India for meeting its coal requirements. The stock had dipped to closing lows of Rs 1,374.50 a share on 15 June, but has rebounded thereafter to Rs 1,427 levels now.

Going ahead, further upside will depend on how demand for cement improves after the monsoon. Analysts remain optimistic on demand revival, largely driven by the government's boost to infrastructure, which in turn should prop up realisations. However, for ACC, the gains might be relatively smaller as it is largely a retail-centric player and has higher exposure to south India, where demand is still weak. Also, commissioning its expanded capacities in East are a few quarters away. Analysts at Ambit say lack of capacity expansions and high retail exposure will restrict ACC's volume growth, especially in an infrastructure spending-driven cement demand recovery. Rising competition from regional manufacturers in north and west India as well as rising threat from new entrants in east India will lead to continued market share loss and restrict unitary Ebitda and return on capital employed growth, they add. Although Ambit's analysts may be more bearish than others, in the cement space, analysts prefer UltraTech amongst pan India or regional and mid-cap players. A meaningful pick-up in demand is the key trigger.