Cost headwinds a dampener for ACC
Premium- ACC posted sequential rise in Ebitda per tonne in Q1CY22 even as cost pressures were high
- Coal, diesel cost inflation is a key worry for cement cos and could weigh on margins ahead
ACC Ltd has started the new year on a good note. The company follows the January to December financial year, and the March quarter is its first. ACC saw 10% sequential rise in its Ebitda/tonne in Q1CY22, a tough quarter. Ebitda is earnings before interest, taxes, depreciation, and amortization.
Given the severe cost inflation pressures, the Street’s general expectations from the March quarter earnings of cement makers are muted. ACC’s Q1 was aided by availability of cheaper inventory and benefits due to its cost-optimization project Parvat. However, it is too soon to celebrate as strong cost headwinds linger. The lagged impact of dearer coal and petroleum coke prices would start reflecting in the quarters ahead.
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“Coal and diesel cost inflation continues to remain a key area of concern for cement producers. Spot pet coke and thermal coal prices have moderated from their peak. Nonetheless, we estimate a 15-20% fuel cost inflation to hit producers in H1FY23E factoring a consumption lag," analysts at Kotak Institutional Equities said in a report on 19 April. The domestic brokerage house has thus cut ACC’s Ebitda estimate for CY22 by 8%.
Though ACC’s Q1 realization was marginally ahead of expectations owing to recent price hikes, they provide little comfort. Dealers’ channel checks by brokerages show that cement prices in April have risen by around 5% from March. However, another 8-10% price increase is needed to absorb inflation as better realizations are key in this environment of elevated costs.
On Wednesday, ACC’s shares rose 7.4% on NSE. The lack of big negative surprises in Q1 could be one reason to cheer. Further, analysts note an immediate trigger would be developments relating to the potential Holderind Investments Ltd (Holcim) stake sale. Media reports said Switzerland-based Holcim aims to exit India and is exploring a stake sale in Ambuja Cements Ltd. Holcim holds a 63.19% stake in Ambuja and a 4.48% stake in ACC. Further, Ambuja holds a 50.05% stake in ACC.
“Reports of Holcim’s stake sale and the consequent open offers would keep the buying interest in both ACC and Ambuja stocks intact for now," said an analyst requesting anonymity. The mood of investors towards these stocks would remain upbeat despite the increased downside risks to their margins, the analyst said.
If the deal goes through, the buyouts of Holcim’s stake would lead to mandatory open offers in both listed companies, Ambuja and ACC. Various estimates of brokerages suggest the acquisition cost could be around $10 billion, making it a landmark deal in the cement sector.
Meanwhile, ACC’s cement sales volumes fell 3% year-on-year to 7.71 million tonnes in Q1CY22. At the start of the quarter, volumes were impacted by muted demand. Further, because of the delayed capacity additions, ACC could not benefit from the pick-up in demand in March, said analysts.
“ACC’s higher capacity utilization rate (+90%) due to slower capacity addition than industry resulted in stagnant volumes and market/capacity share loss," analysts at Yes Securities Ltd said in a report.
Investors should note that ACC’s integrated unit at Ametha, Madhya Pradesh, will now be commissioned by Q4CY22 instead of Q2CY22 as stated earlier. This could weigh on volume growth outlook for CY22. ACC’s shares closed at ₹2,208.25 apiece on NSE. JM Financial Institutional Securities values ACC at 11x one year forward Ebitda. The broking firm has a target price of ₹2,400 for ACC shares. Market share losses have meant that the ACC stock trades at relatively cheaper valuations compared with large peers.
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