No respite in sight for ACC

With no rise in cement demand and realisations, earnings will remain under pressure in the near term

The impact of weak cement demand and realisations was clearly evident in ACC's performance for the fourth quarter (Q4) ended December 2013, as well as management commentary on the near term. While cement volumes at 5.85 million tonnes (mt) were lower than 5.94 mt in Q4of CY12, for the full year, too, ACC sold 23.93 mt versus 24.10 mt in CY12. The demand situation remained so weak that all India average prices in Q4CY13 at Rs 293 per 50-kg bag could move up just 0.8 per cent versus the September 2013 quarter, the weakest for the industry as the monsoon season affects construction activities. Even on a year-on-year (y-o-y) basis, it is up about one or two per cent.

Although financials for Q4 are not strictly comparable, as the ACC's RMC (ready mix concrete) business was merged in the December 2012 quarter, sales for Q4 at Rs 2,693 crore were lower than Bloomberg consensus estimate of Rs 2,730 crore. Flat realisations, lower volumes, and increasing costs put pressure on ACC's profitability.

The rising freight cost pressures due to the rise in diesel prices and higher railway freight rate dented the Ebitda, which came at Rs 263 crore versus estimates of Rs 287 crore (margins slipped into single-digit at 9.76 per cent). The tax reversal of Rs 76 crore during Q4, however, helped ACC post net profit of Rs 276 crore. Analysts had estimated ACC's pre-tax profit at Rs 274 crore, which came in much lower at Rs 237 crore.

Cement demand is yet to show signs of improvement, even as analysts had expected pre-election spending by the government to boost demand. The management itself does not see much respite and said: "Based on current demand indications, we do not foresee any significant improvement in the cement market in the near term."

The channel checks at end-January by ICICI Securities indicate some price recovery (of Rs 10-15 a bag) in northern, eastern, central regions. However, prices in the south declined while remaining flat in the west. For ACC, which saw its last capacity addition in Karnataka, to support supplies in the south and west, the news is not encouraging. Also, given the weak demand, it will be seen how cement companies can sustain price hikes.

ACC's stock closed 1.1 per cent up at Rs 1,018 on Thursday as the company announced a dividend of Rs 19 a share. At current price, it is trading at a replacement cost of $100 a tonne, which is cheap. However, weak demand and pricing environment means the pain in terms of financial performance will continue for a couple of quarters more. Out of 13 analysts polled by Bloomberg since January 2014, only two have a 'Buy' rating, with the remaining holding a 'Sell' to 'Neutral' rating.