ACC 1Q2018 result review: Strong volume growth and operational performance

ACC, one of the top cement companies in India having a capacity of 33.4 mn tonnes, posted a strong set of earnings in the first quarter of 2018 on the back of healthy volume growth from both the Cement and Ready Mix Concrete (RMC) segments. The results came ahead of expectations as the company reported a strong improvement in operating margins resulting in double-digit EBITDA growth.

Strong operational performance

Buyout demand in the eastern markets drove up cement volumes. The company reported an increase of 7.7% YoY (year on year) in cement volume while the RMC volumes grew 16.7% YoY.

Realisations in the cement segment witnessed minor improvement QoQ (quarter on quarter). Overall, ACC reported a topline growth of 3.7% over the last quarter.

The operating performance metrics are not comparable YoY due to removal of excise duties and the introduction of GST last year.

On a QoQ  basis, ACC benefited from lower raw material prices and stock purchases as well as lower employee expenses. However, the gains were partly offset by an increase in power and fuel costs as well as freight and forwarding expenses. Overall the costs dipped by ~1% which resulted in an improvement in EBITDA margin from 12.7% in the previous quarter to 13.6% in this quarter. Other expenses remained largely stable.

Key developments

The board of ACC has recommended the renewal of technology and knowhow agreement with Holcim Technology Ltd (which expired in December 2017) for a three-year period with no change in royalty conditions.

The pending merger of ACC with Ambuja Cements has been put on hold. Subsequently, the board of both companies have decided to enter into a Master Supply Agreement (MSA) which would be synergetic to both companies. The MSA would allow these companies to procure clinker, cement, raw materials from each other as well as use spare capacities on mutually agreed terms.

Growth Outlook

The growth outlook for the sector and company appears positive as the demand in the industry is expected to pick up over the next 6-12 months as the execution of infrastructure projects gathers momentum.  Besides,  government focus on affordable housing will further spur demand in the sector.

ACC would benefit from industry demand as well as potential synergies with Ambuja Cement. While the realisations continue to remain stable, the continuous increase in power and fuel costs (linked to rising pet coke prices) and freight expenses would keep a check on the margins.

Taking into account its growth prospects, the stock seems reasonably priced at an EV/LTM EBITDA multiple of 13.5x.