The trinity of strong volumes, cost optimisation and favourable product mix helped ACC post a stellar performance for the quarter ending December'17, its fourth quarter as the company follows a January-December financial year. These helped ACC post a 126 per cent year-on-year surge in net profit to Rs 2.06 billion, much head of Bloomberg consensus estimate of Rs 1.65 billion. Thus, it is not surprising that ACC's share price surged 6.4 per cent to Rs 1,692.30 on Thursday. And there are more triggers for the company, which could take its share price even higher, say analysts.
Benefits of capacity expansions
Sales volumes grew by a strong 27 per cent year-on-year to 6.92 million tonnes (MT). This was partly due to a low base as the year ago quarter has seen volumes fall by an estimated 9 per cent, and secondly, due to the ramp up of recently commissioned capacities at its Jamul and Sindri plants. Even then, it was ahead of most analysts' estimates of a growth of 20-23 per cent. Analysts as those at Motilal Oswal Securities were expecting sales of 6.6 MT for the December quarter. The rising capacities in the East region where demand growth remains strong helped ACC post strong sales volumes.
Thus, revenues at Rs 34.2 billion grew 30 per cent year-on-year and came well ahead of Rs 28.11 billion estimated by analysts as per Bloomberg data.
Neeraj Akhoury, managing director and CEO of ACC, said that the company registered robust revenue growth across categories and geographies, with an increased focus on premium products and a targeted approach and markets, delivering strong top-line growth.
Cost optimisation boosts profitability
During the quarter, prices were soft given that average pan India cement prices of a 50 kg bag stood at Rs 288 (analysts estimates), lower than Rs 290 in the seasonally weak September'17 quarter and Rs 303 in the year ago quarter. But despite this, ACC posted a strong operational performance.
Notably, coal and logistic costs too have continued to rise with ACC witnessing a surge in power and fuel costs as well as freight expenses. Power and fuel costs, for instance, surged by a third to Rs 7.09 billion over same quarter last year while freight expenses too came 37 per cent higher at Rs 9.42 billion. But, as ACC managed to keep overall expenses under control, its operating cost/tonne stood at Rs 4,410, which was broadly flat on year-on-year basis and down by about three per cent sequentially.
Thus, ACC's operating profit at Rs 4.43 billion came much better than Rs 2.87 billion in the year ago quarter, leading to operating profit per tonne of Rs 506. If the company is able to sustain this trend, it may be able to catch up with its pan India peer such as UltraTech, which had reported per tonne operating profit of Rs 717 in December quarter; Shree Cement, which is largely a north based player with some presence in east, had seen much better per tonne profitability of Rs 1,057.
Future prospects healthy
Analysts, however are hopeful on the profitability front. With benefits accruing from capacity expansion and given the sustained cost control efforts, they believe the expected uptick in realisations in the subsequent seasonally strong quarters can help ACC improve its profitability profile further.
Binod Modi at Reliance Securities say that the improved performance in December quarter is purely on account of better demand scenario in eastern markets, cost optimisation and favourable product mix. While operating profit per tonne at Rs 506 still appears poor compared to other pan India cement players, we believe cost optimisation measures and likely improvement in realisations in its key markets will aid ACC to improve margins, going forward, Modi adds.
There are other triggers too, though not a secret for markets. Further gains can accrue looking at the expected merger of Ambuja Cements and ACC, the two Lafarge-Holcim group companies. Analysts say that the expected merger with Ambuja Cements and potential improvement due to cost synergies will lead to gains for the stock as well.