ACC: Hold

From our buy recommendation in February, the stock of ACC has rallied 43 per cent to ₹1,509 now. Though not an out-performer in the cement pack, the stock’s returns have been better than the market.

Shareholders can continue to remain invested.

Cement demand has just started picking up. In the September quarter, the sector recorded 10 per cent growth in production. If the ongoing efforts by the government to kick-start the investment cycle begin with a thrust on infrastructure and housing projects, cement players may see the good times come back. Improving demand, increase in cement prices, falling fuel and thermal coal prices should all help cement companies.

Being among the top three players in the country (total capacity of 30 million tonnes per annum (mtpa) and with a significant exposure to South India where infrastructure activities are likely to increase sharply, ACC should benefit.

But one constraint for the company is capacity. ACC has not added new capacity for more than two years. Now that demand is picking up, the company is not able to grow despatches to the extent others are. In the September quarter, ACC saw only 1.4 per cent rise in despatches. The company’s ongoing capacity additions might take at least a year to commission. New capacities of total 5 mtpa (in Chhattisgarh, Jharkhand and Kharagpur) will start production by end-2015.

In the near term, the company's performance should be aided more by cost saving and higher realisation that will improve margins. The ACC stock trades at 16 times its estimated earnings for 2016. In the last three years, the stock had traded in the band of 15-24 times. Ambuja Cements, that also belongs to the Holcim group, trades at about 17 times its likely earnings for 2016.

In the first nine months of 2014, ACC reported a 6 per cent growth in sales, and profits have risen by 3 per cent compared with last year. In the recent quarter, however, the company’s sales growth has been higher, helped by better realisation. In the July-September period, ACC’s sales grew 9 per cent compared with the same period last year.

Cement prices across regions have increased in the last few months, thanks to pick up in demand. In the September quarter, the all-India average prices were up by 3-5 per cent over the same time last year. The steepest increase in price happened in the South (7-13 per cent) where ACC has a third of its capacities.

ACC’s operating profits in the September quarter rose 32 per cent. At the net level, profit was higher 69.5 per cent, thanks to lower tax rate and increase in other income.

The operating margin was 13.8 per cent in the September quarter, up from 11.4 per cent in the same period last year.

Margins may improve further given that cement prices are moving north, while cost pressure is coming down. Thermal coal sells for about $60-65/tonne — a five-year low. Coal prices may remain low as large buyers, mainly China, cut imports even as supply continues to rise.

ACC is among the high-cost cement manufacturers. Efforts to replace old inefficient plants where maintenance cost is going up and to minimise power costs — through waste heat recovery, use of alternative fuel and increasing captive power — should help. Softer crude oil price should also help bring down freight costs.

ACC has not been aggressive with capacity additions in the last two-three years, unlike UltraTech Cement or some small players. Now, when demand is picking up and companies which expanded are showing significant volume growth, ACC’s numbers are muted. But, even now, ACC’s capacity utilisation in the South is relatively low.

When demand picks up in this region, ACC will benefit. The company has about 10 mtpa capacity in the South. Also, in a year’s time, as the company’s 2.7 mtpa unit in Kharagpur starts production, it should start regaining market share.