Note ban and the contrasting tale of two cement players, ACC and UltraTech

ACC disappointments on operating profit and volumes fronts in December quarter lagging UltraTech UJJVAL JAUHARI

While the street expected demonetisation to hit cement majors, the impact was more profound on ACC’s performance during December quarter, its last quarter for the calendar year 2016. 

The other pan-India peer UltraTech had seen a 2% decline in volumes in its third quarter of 2016-17, while ACC’s volumes for the quarter at 5.45 million tonne declined 9.1% from 6 MT in the year-ago quarter. 

ACC’s revenues at Rs 2,672 crore declined 6.2% year-on-year and were lower than Bloomberg consensus estimate of Rs 2,720 crore. UltraTech, on the other hand, had seen revenues decline just 2% y-o-y.

With demand being impacted by demonetisation, the industry has seen about 60% capacity utilisation during the December quarter of the current financial year, compared with 75% in the same quarter of FY16. In this weak realisation environment, the cost surge added to pressures on profitability. While UltraTech had still been able to report operating profit ahead of estimates, ACC’s operating profit (Ebitda) at Rs 256 crore came lower than consensus estimates of Rs 268 crore as indicated by Bloomberg. The year-ago quarter had seen ACC report Ebitda of Rs 280 crore.

The company, however, said that it was working on the operational efficiencies and operating costs in 2016 (also the financial year of the company) have declined by a percent driven by fuel and raw material optimisation. Also, continued thrust on promotion of the company's range of premium products, comprising high-performance varieties that come coupled with services, yielded an increase of about 27% in the sale of these products during the year.

However, for the quarter, while the push for premium products range may have helped ACC improve realisations (up 1.6% year-on-year and 0.6% sequentially), the pressure on costs was still visible. Power and fuel costs were up 9.6% sequentially on the back of rising coal and freight, leading to operating cost per tonne rising 3.3% year-on-year and 2.9% sequentially. As a result, Ebitda per tonne at Rs 343 was lower than Rs 430 in the immediately preceding quarter and Rs 405 in the year-ago quarter. 

In comparison, Ultratech's Ebidta per tonne at Rs 890, was not only superior to that of ACC, but was also an improvement over the Rs 872 it achieved in the September quarter, though it was lower than Rs 978 achieved a year ago. Not surprising, UltraTech stock commands premium valuations compared to ACC. While ACC is trading at replacement costs of $113/114 per tonne for CY17/18 respectively, UltraTech is trading at $213/206 per tonne for CY17/CY18 respectively. This premium, however, will continue given the higher size and profitability of UltraTech.

However, for both the stocks, improvement in demand and realisations is the key trigger. Analysts at Reliance Securities have 'hold' ratings for both stocks post results, as do many others.

On the positive side, the Union Budget's stimulus for roads, affordable housing and other infrastructure projects should boost cement demand, which is a positive for pan-India players. ACC had commissioned 1.35 million tonne cement grinding unit at Sindri in Jharkhand in October 2016, completing the new integrated project with its clinkering line of 2.79 million tonne and grinding unit of 1.10 million tonne in Jamul. This should bode well for the company, though in the near-term, there will be pricing pressures in eastern India, looking at various capacities of many companies coming on stream.

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel