UltraTech relatively happy in comparison with ACC on the D-Street

A likely demand improvement, declining costs is keeping some analysts positive on ACC, but UltraTech's better placed given higher per tonne profit and expanded capacities

ACC’s lower-than-expected performance for the December quarter, led by sharper-than-expected fall in realisations, disappointed the Street. This had a domino effect on the bourses. The company’s share price fell over three per cent on Monday and another 0.8 per cent on Tuesday. 

ACC’s results were announced after market hours on Friday. In contrast, over a fortnight ago, UltraTech’s shares had gained 2.5 per cent after it posted relatively better numbers for the October-December period. Although UltraTech is far bigger in size, the two are comparable given their pan-Indian presence.

ACC’s cement volumes grew 4 per cent year-on-year (YoY) to 7.8 million tonnes (MT) during the quarter, but realisations fell by more than 5 per cent sequentially and were flat YoY, thereby offsetting the volume gains. 

Cement prices remained under pressure across the country with per 50 kg average price down from Rs 351 in the September quarter to Rs 341 in the December quarter. It was led by weakness in South, East and West India (by Rs 10-17 a bag). 

North and Central India saw lower pressure, with cement prices down Rs 3-4/50 kg bag. For ACC, which has more capacities in South and East India, it meant a sharper decline in realisations. UltraTech, too, had seen pressure on realisations, but it was down 3.8 per cent (and up 3 per cent YoY) due to its more diversified geographical presence.

Consequently, ACC’s sales at Rs 3,980 crore came lower than Bloomberg’s consensus estimate of Rs 4,089 crore. The company’s per tonne profitability, too, declined 19 per cent sequentially to Rs 697, according to analysts’ calculations. Earnings before interest, tax, depreciation and amortisation (Ebitda) at Rs 541 crore also missed estimates of Rs 614 crore. And, net profit at Rs 273 crore also came lower than Rs 357 crore estimated by analysts.

In comparison, while UltraTech saw a relatively lesser pressure on realisations, it has also seen better cost reductions. The unitary cost for ACC declined by a per cent YoY and 2 per cent sequentially to Rs 4,536 per tonne. This was due to source mix optimisation, logistics efficiency and better supply chain management. Power/fuel and freight expenses also declined sharply, but higher inventory costs were a key drag on profitability, say analysts. 

UltraTech saw higher reduction in operating expenditure, which was down 3 per cent YoY and 4.3 per cent sequentially. Thus, at Rs 1,008 per tonne for the December quarter, UltraTech continues to report better profitability.

Moving forward, analysts expect the cement industry’s outlook to improve on higher demand. It has been a drag for most of CY2019. Moreover, fall in costs of pet coke along with lower diesel prices (led by decline in crude prices) should benefit the logistics and energy expenses of all cement players.

As a result, despite a weak show in the December quarter, many analysts maintain their positive outlook on ACC. 

Also, concerns over slower pace of its capacity addition should resolve, starting end-2020, given that new plants worth 5.9 MT per annum (18 per cent of current capacity) will gradually come on stream over CY20-22. 

However, analysts at Nomura say that there may not be much benefit from new capacity in CY20 and, in their view, ACC is not fully geared to benefit from potential demand pick-up. 

According to HDFC Securities’ analysts, ACC operated at 98 per cent capacity utilisation in the December quarter.

UltraTech, however, should benefit more, given its already expanded capacities. Moreover, it has more capacities in North and Central India, which is expected to see an  improvement in utilisations compared to other regions.

Consequently, the ACC stock, which had seen some catch up in the last six months after years of underperforming UltraTech, may remain a laggard.