ACC’s strong operating performance lifts sentiment amid Covid-19 lockdown

Even as the volume pressure was evident on ACC’s March quarter performance and realisations disappointed, cost controls pulled up the company’s operating performance. With both, operating and net profit ahead of estimates, the stock gained more than 8 per cent on Wednesday.

With the lockdown in progress, cement sales volume at 6.56 million tonne (MT) declined 12 per cent year-on-year and 16 per cent sequentially, in March quarter (Q1, for the company follows January-December accounting year). Realisations at Rs 4,702 per tonne improved marginally by 0.9 per cent sequentially helped by price hikes taken by cement players at the start of the March quarter (prior to Covid-19 led disruption), but were still down by 0.3 per cent on year-on-year basis. “The reported realisation were Rs 70 per tonne lower than our estimates,” said Binod Modi at Thus, net sales at Rs 3,433 crore declined almost 10 per cent year-on-year in Q1.

ACC, however, did well on the cost front. Pet coke and diesel prices have continued softening, and helped lower transportation and energy expenses, the two key costs for cement makers. The increase in premium cement sales and cost optimisations helped.

Earnings before interest, tax, depreciation and amortisation (EBITDA) at Rs 586 crore thus, grew 10 per cent and came much better than consensus analysts’ estimates of Rs 525 crore. So, net profit at Rs 323 crore was also better than estimates of Rs 315 crore.

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While variable costs (in energy and transport) are expected to remain soft, aims to keep tight control on fixed costs as well. However, concerns on volume growth being impacted by Covid-19 outbreak continue, and hence, realisations may soften too. With peak construction season getting impacted, now, analysts expect recovery in construction services only in the December quarter.

For ACC, however, its cheap stock valuations should provide supportive. Analysts at Financial Services say that trades at a 35-55 per cent discount to peers such as Shree Cement, UltraTech and Ramco Cements and such a large valuation discount is excessive.

Also, ACC, having commissioned capacity in East India, has arrested its market share losses since CY17 and should continue to grow in line with the market. Further, the company’s ongoing expansions should also come on stream by end of the year and the proportion of inefficient capacities would decline. The company also has a strong balance sheet and is well placed to withstand any extended disruption while falling costs may moderate the earnings impact of disruption, say analysts.

Target prices of Motilal Oswal, and range between Rs 1,310 and Rs 1,440 for the stock trading at Rs 1,207.