ACC stock gains nearly 13% on bourses as unit profit hits multi-year high

Led by a strong jump in per-tonne profit to a multi-year high in the June quarter, the stock of cement major gained nearly 13 per cent on the bourses on Tuesday.

Better than expected realisation and operational efficiencies helped boost the operating profit to about Rs 813 a tonne, the highest in five years, according to analysts at brokerage Prabhudas Lilladher. ACC reported per-tonne profit at Rs 736 in the year-before quarter and Rs 597 in the previous quarter. Not surprising, the Street has upgraded the stock.

The Street will keep an eye on whether the company will sustain this performance. For now, with a narrowing profitability gap to its peers, led by a higher proportion of premium sales and rationalisation of fixed costs, the trading discount is expected to shrink. While ACC traded at a 50-55 per cent discount to Shree Cement and UltraTech, and 43 per cent to the peer average, analysts at Motilal Oswal Securities now value ACC at a 30 per cent discount to peers, to arrive at a target price for the stock of Rs 1,633. This is 11 per cent further from the current market price of Rs 1,463.

The company had been losing market share in the absence of new capacities. This began to change as capacities started coming on stream in the eastern part from 2016. While modern plants are improving the overall profitability, strong volume growth is also leading to market share gain. During the June quarter, Eastern India had seen stronger realisations as compared to many other regions and growing volumes in the region helped boost overall company's realisations too. ACC saw volume grow seven per cent year-on-year; blended realisation per tonne rose 5.9 per cent over a year and 6.2 per cent sequentially, to Rs 5,204.

The all-India average cement price for a 50-kg bag during the quarter at Rs 293 was lower than the Rs 304 a year before,r though slightly higher than Rs 288 sequentially. UltraTech's blended realisation per tonne in the quarter at Rs 4,843 had declined 2.3 per cent year-on-year, though marginally up from Rs 4,811 in the March quarter.

Helped by improving realisation and volume, net sales improved 13 per cent over a year. Earnings before interest tax depreciation and amortisation grew 18.6 per cent to nearly Rs 5.9 billion, ahead of the consensus estimate of Rs 5 billion. Profit at Rs 3.3 billion was much ahead of the consensus estimate of nearly Rs 2.7 billion.

The significant improvement in operational performance at a time when cost pressures remain high, led by rising energy and logistic costs, is commendable. However, the ongoing September quarter might pose a challenge. This seasonally weak quarter sees demand and realisations weaken due to the monsoon, which impacts construction activity.

For cement companies realisation improvement remains the key to watch. ACC's June quarter show was helped by higher realisations, while energy cost (20 per cent of overall cost) rose 9.7 per cent year-on-year; freight cost (27.4 per cent of the total) jumped 18.7 per cent. In a rising cost environment, whether ACC is able to improve realisations will be key in the September quarter.

Further for ACC, there is no major capacity addition in the near term, which could lead to capacity constraints beyond 2019, feel analysts. Prabhudas Lilladher says capacity expansion through organic or inorganic routes would allay investor concern on volume growth.