Key takeaways from ACC’s Q2 results

Vishal Balabhadruni |BL Research Bureau | Updated on: Jul 15, 2022

While input prices have cooled a bit in July, whether it sustains is a wait and watch

ACC’s second quarter results (company follows calendar year) were tepid. While revenue at ₹4,468 crore was in line with the consensus (Bloomberg), EBITDA failed to meet consensus expectations of ₹502 crore, and was lower by 15 per cent at ₹426 crore. The operating profit reported was ₹261 crore, which was well below the consensus estimate of ₹413 crore.

The company did well on the volume front by registering 7.56 million tonnes, which was 10.5 per cent higher than that in the same quarter last year. Revenue grew 15 per cent Y-o-Y. The higher sale price of cement helped. The sale price in Q2 2022 was ₹5,337 per tonne, a 4 per cent rise over the same quarter in the previous year.

Margins shrinking

The major issue being faced across the industry is fuel costs. Increased volatility in the international market has enhanced the input cost, which has taken a toll on margins. The EBITDA margin saw a steep decline of 13.1 percentage points YoY and settled at 9.5 per cent for Q2 2022, from 22.8 per cent in Q2 2021. The PAT margin declined 9.7 percentage points to settle at 5.16 per cent in Q2 2022.

Power and fuel costs rose to around 30 per cent of sales in Q2 2022 from 21.8 per cent of sales for the same period in the last quarter. The per tonne cost of power rose 44 per cent in Q2 2022 over Q2 2021. Raw material cost as a percentage of sales rose 3.3 percentage points in Q2 2022 to 16 per cent over 13.3 per cent in Q2 2021. The freight cost has been flat, hovering around 24 per cent of sales.

Outlook

Going forward, while the demand outlook seems decent given real estate demand and the infra push by the government, relief in input costs is key for an optimistic outlook. The price of imported coal is near a multi-year high at $432 per tonne in Q2, 2022; the highest price was $428 per tonne (May 2022). The price of Brent seems to have cooled a bit and is trading at $99.8 per barrel, in contrast to around $120 in June 2022. Along with Brent crude, petcoke prices also seem to be stabilising. According to a report by Motilal Oswal, domestic petcoke prices fell 10 per cent M-o-M to ₹20,144 per tonne in July 2022. In addition there has been news of cheaper Russian coal entering the market. Whether these price declines sustain and provide the scope for margins to stabilise and expand from here, requires a wait and watch approach.

Valuation

ACC has corrected around 20 per cent from its peak levels in November last year. Despite tepid results, the stock is down by around one per cent in reaction to the results, as the impact of cost pressures was already factored to some extent Adani group’s open offer to acquire 26 per cent of outstanding shares at Rs 2,300 could also provide some support for now.

ACC is currently trading at a forward P/E of 21.7x (five-year average is 21.6x), while Ultratech is trading at 24.5x (5 year average is 29.9x), Shree Cements at 28.1x (5 year average at 36.8x) and Ambuja Cements at 23.8x (5 year average at 22.3x).

ACC is trading inline with its historical average. The mixed outlook - decent demand, but continuing cost pressures - can keep the stock subdued for the near term. However, from a long-term perspective, given the structural growth prospects for the cement industry in India, ACC appears well positioned to capitalise on this trend. Prospects for enhanced synergies as the Adani group takes control of ACC as well as Ambuja Cements, may also bode well from a long-term perspective.

Published on July 15, 2022
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