Contrasting show from ACC, UltraTech

Following the note ban, the Street was estimating the move to hit cement majors. The impact has been especially hard on ACC’s performance in the December quarter.

In fact, after ACC’s exceptionally good operating performance in the June quarter, there were hopes that the company could start catching up with its larger pan-India peers. However, not only did it fail to sustain the improvement in the September quarter but the trend has continued.

As a result, the stock has lagged UltraTech, its parent Ambuja Cement, and Shree Cement in the past six to 12 months. It is likely to remain a laggard.

UltraTech had reported a two per cent decline in volumes in the third quarter of 2016-17 when it announced numbers around a fortnight before. On Friday evening, ACC announced a 9.1 per cent decline in volumes at 5.45 million tonnes (mt) for the December quarter, compared to six mt in the year-before quarter. Net sales at Rs 2,672 crore fell 6.1 per cent year-on-year and were lower than the Bloomberg consensus estimate of Rs 2,720 crore. UltraTech saw net sales decline only 1.4 per cent.

With demand being impacted by the note ban, the industry during the December quarter had seen a drop in capacity utilisation to 60 per cent, from 75 per cent in FY16. In a weak realisation environment, the cost surge added to pressure on profit. While UltraTech had still been able to report operating profit higher than estimated, that of ACC (earnings before interest, taxes, depreciation and amortisation or Ebitda) at Rs 256 crore came lower than the consensus estimate of Rs 268 crore. The year- ago quarter had seen Ebitda of Rs 280 crore.

ACC said it was working on operational efficiencies and costs in 2016 (their financial year is January to December) had declined by one per cent, driven by fuel and raw material optimisation. Also, a thrust on promotion of premium products, comprising high performance varieties that are bundled with services, yielded an increase of about 27 per cent in the sale of these during the year.

While this might have helped ACC improve realisation (up 1.6 per cent over a year and 0.6 per cent from the earlier quarter), the pressure on costs was more. Power and fuel costs were up 9.6 per cent sequentially, on the back of rising coal and freight cost, leading to operating costs per tonne rising 3.3 per cent year-on-year and 2.9 per cent sequentially. Ebitda per tonne at Rs 343 was lower than the Rs 430 in the previous quarter and Rs 405 in the year-before one.

Comparatively, UltraTech’s Ebitda per tonne of Rs 890 was much better, versus Rs 872 in the year-ago quarter, though lower than Rs 978 in the September 2016 one. This could be attributed to a better fuel mix and lower transport costs.

Also, with regular capacity addition, UltraTech continues to clock better volumes than ACC, which has lagged in adding capacity. Better profitability and volume growth (including through acquisitions) are reasons why the UltraTech stock trades at a premium to ACC and most other cement shares.

While ACC trades at replacement costs of $113/114 a tonne for CY17/18, respectively, UltraTech is at $213/206 a tonne, respectively. This premium will continue in the near term. But, once ACC and Ambuja Cement merge, the market would be keenly keeping track of the cost and other synergies the combined entity can derive.

However, for now, improvement in demand and realisations are the key trigger for cement stocks. Analysts at Reliance Securities have ‘Hold’ ratings for both ACC and UltraTech after their 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, positive for the two pan-India companies. ACC had commissioned a 1.35 million tonne grinding unit at Sindri, Jharkhand, at the end of October, completing the new project with a clinkering line of 2.79 mr and a grinding unit of 1.1 mt at Jamul. This should bode well, though in the near term there will be pricing pressure in the east, looking at the various capacities coming on stream.