Rising costs offset volume growth benefits for ACC

Profitability below Street estimates because of subdued realisations

Rising costs and flat realisations meant ACC’s December quarter profits were lower than expectations even as volume growth remained strong. Its stock lost 1.4 per cent on Tuesday.

The company continues to witness strong volume growth, led by robust demand and capacity expansions in the east. Cement sales at 7.5 million tonnes (mt) grew 8 per cent year-on-year, and 14.5 per cent sequentially, which were ahead of expectations. The ready-mix concrete business, too, saw double-digit growth sustain at 15 per cent year-on-year.

However, realisations played spoilsport. Higher realisations in central and north India were largely offset by weaker prices in east and south India. This meant the company’s average realisation/tonne declined by 2.6 per cent sequentially but was up 1.4 per cent year-on-year to ~4,634. This was about ~135146 per tonne lower than analyst expectations.

The company’s net sales at ~3,789 crore, however, could still grow 11 per cent year-onyear, helped by the rising focus on premium products. The impact on profitability was due to rising energy costs, though lower diesel prices helped control logistics costs. Rising raw material (up 25 per cent year-on-year) and power and fuel costs (up 8 per cent year-on-year) meant the company’s input costs per tonne rose by about 6 per cent yearon-year and 10 per cent sequentially to ~2,018. Freight cost/tonne declined 4 per cent sequentially to ~1,378 and some respite was also provided by falling expenditure.

Based on analyst calculations, it was not surprising that per tonne cement profit at ~513 was not much higher than the ~506 in the year-ago quarter. It was ~553 in the previous quarter.

The reported profit of ~732 crore was up more than threefold, though it included tax write-back of ~501 crore. Also, it incurred one-time employee separation costs of ~23 crore. Thus, adjusted for oneoffs, profit stood at ~215 crore, much lower than consensus estimates of ~253 crore.

Going ahead, it is the pickup in realisations that holds the key for earnings growth. Analysts such as Binod Modi at Reliance Securities said that the company’s operating performance will improve from the current quarter led by recent realisation hike in the southern and western markets.

Notably, its pan-India peer UltraTech also felt the pressure of lower realisations and rising costs. It, however, reported a much-better per tonne profitability of ~772. Shree Cement, which has a large presence in north, east and central India and recently expanded into south India, had reported ~1,067 per tonne profitability for its cement division. It is on better profitability and timely capacity expansions which help these companies command higher valuation multiples. Hence, profitability improvement remains crucial for ACC if it were to catch up on valuations.

Slower capacity expansions have also been a concern for ACC. The same, however, is being addressed. “We are excited to continue this growth momentum as we add new cement capacities of 5.9 mt through greenfield integrated cement plant at Ametha in Madhya Pradesh, with a grinding unit in Uttar Pradesh and expansion of our Tikaria and Sindri plants,” said Neeraj Akhoury, managing director & CEO of the company.