ACC Cement results reported a 60% YoY decline in Net Profit due to hike in raw material prices

ACC Limited is India’s leading cement and concrete producer. It manufactures and markets cement and ready-mixed concrete. It is a one of the most well-known names in the nation with a distinguished history of a few decades in the cement industry..

ACC Ltd is a subsidiary of Ambuja, which Holcim formerly owned. As Holcim has signed a deal for the Adani Group to purchase its cement business in India, which consists of its 4.48 % direct share in ACC as well as its 63.11 % ownership in Ambuja Cement, which holds a 50.05 % interest in ACC. Consequently, the Adani group now directly owns both businesses (ACC & Ambuja Cements). The Indian cement industry dynamics have changed as a result of this transaction. As Adani Group, which had a 0% share in the Indian cement industry, is now the country’s second-largest cement producer after UltraTech Cement.

ACC cements follows Jan-Dec as financial year and results for Q2FY22 were announced on 14th July 2022. The company has seen a decent top line growth while their bottom line & EBITDA have declined significantly due to impact of fuel cost increase despite strong efficiencies delivered under project Parvat. Moreover, ACC cement share price has seen a slight fall after the announcement of Q2FY22 results. Let’s now examine their Q2FY22 results in deeper details

ACC Cement results: Revenue rises YoY & EBITDA declines in Q2FY22

ACC Cement’s consolidated revenue came in at 15% higher at Rs. 4,468 crore for the Q2FY22, up from Rs 3,885 crore in the Q2FY21. While on a QoQ basis, the revenue grew marginally by 0.9% from Rs. 4,427 crores in the Q1FY22 to Rs. 4,468 crores in Q2FY22.

The slowdown in demand and pricing, as well as the increased costs of power and pet coke, had an effect on the quarter. However, the company was able to reduce its staff costs and other expenses, which were slightly lower than in prior quarters, thanks to the improvement in operating efficiencies.

EBITDA (earnings before interest, tax, depreciation, and amortization) for the current quarter came in at Rs 426.23 crore which was down 51% from the EBITDA of Rs 869.4 crore reported during Q2FY21. Consequently, EBITDA margins tanked drastically to 9.4% for the Q2FY22 compared to the EBITDA margins of 22.4% Q2FY21.

ACC Cement results: PAT declined YoY despite increase in revenue

ACC Cement reported a 60% decrease in consolidated profit after tax of Rs. 223 crores in Q2FY22 from Rs. 566 crores in the Q2FY21. While on sequential basis, ACC saw a 43.2% QoQ fall from Rs. 393 crores in Q1FY22 to Rs. 223 crores in Q2FY22.

In the reported quarter, the company experienced a rise in overall production costs compared to prior quarters, which had an effect on its bottom line. The cost of raw materials as a share of operating revenue increased by 250 basis points YoY to 15.5%. The margins were most negatively impacted by the surge in power and fuel expenses, which increased by 6% QoQ and 8% YoY to account for 29.4% of total revenue. Fuel price increases also had an effect on freight expenses, which rose by 40 basis points (bps) YoY and QoQ to account for 24.1% of revenues.

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Potential of ACC Cement Share increased after ACC accelerated its Capex spend

Recent capacity expansion plans by large cement producers like UltraTech Cement Ltd. and Shree Cement Ltd. could, in the medium term, result in a glut. According to industry experts, this may limit future earnings growth for cement companies. The industry’s stakeholders are striving for aggressive capex plans, especially after the Adani group purchased Holcim’s stake.

After the Adani Group completes its acquisition, the market has been speculating on the capital expenditure intentions of ACC Ltd. and Ambuja Cements Ltd. This may have prompted the major cement producers to reveal new expansion plans. To increase capacity to 140 million tonnes annually, Adani plans to double it in 5 years. In order to compete with its main opponent UltraTech, Adani is intending to invest even more money than the $10 Bn it has already paid to acquire stakes in Ambuja and ACC. As a result, ACC increased its capex plans to Rs 10.85 billion in H1CY22.

FY23 Outlook

GDP growth for FY23 is anticipated to be 7.2%. (CRISIL). Growth is at risk of declining because of the erratic price of crude, inflation, and geopolitical risk. Private sector support is anticipated, driven by the PLI programme and better capacity utilisation. Urban consumption will increase as projected by the normal monsoon for the fourth year in a row.

Consumer Price Index (CPI) inflation is anticipated to be 6.8 % for FY23, repeatedly exceeding the RBI’s medium-term upper ceiling of 6 % during Jan.-May’22, despite the fact that inflation remains a significant concern for the year. Additionally, the government is committed to a broad fiscal consolidation plan, with the current account deficit projected to increase from an anticipated 1.6 % of GDP in FY22 to 2.4 % of GDP in FY23.

Technical Analysis: ACC Cement Stock

ACC cement share is currently facing a resistance of level of 2380 and immediate support of 2047. ACC Limited stock has been on a sideways trend for past few months after recording a sharp correction in the beginning of year. After reporting a lower-than-expected ACC cement results for the Q2FY22, ACC cement share price has been falling in last two trading session.

It is not just ACC cement stock, while other cement stocks have also seen correction, and many have hit their 52 weeks low. ACC cement share is currently 19% below its 52 weeks high with 50 EMA below 100 & 200 EMA. The cement stocks have a lot of potential in the long run, once the inflation and hike in input prices settle, they are expected to enter in the uptrend.

HDFC securities said, “We maintain BUY on ACC, with a lower TP of INR 2,380/share. The upcoming expansions in the central market will boost its volume growth visibility from CY23 onwards.”

Our view:

Cement is a business that is inextricably tied to economic growth, especially in a developing economy like India, which is one of the world’s largest demands driven economy is also the second largest cement market in the world after China. As the cement sector has been facing severe headwinds lately, most of the cement stocks have seen major correction in their share prices in 2022.

The upcoming expansions in the central market will boost its volume growth visibility from CY23 onwards. ACC is also increasing its green power mix and alternative fuel usage to mitigate the impact of rising fuel costs. In ACC Cement results for Q2CY22, while consolidated revenue rose 15% YoY (on a low base), EBITDA/APAT fell 51/61% YoY on sharp energy cost inflation.

Even the margin pressure is likely to continue in H1FY23E as variable cost/ton is expected to remain elevated due to an increase in input costs and inability to pass on the cost increase. While talking about the long-term view, investors need to keep a check over any correction in input prices as this will have a significant impact on EBITDA margins and bottom line of the companies. Unless there is a change in the raw material prices or any change that will lead to higher realisation/tonne for cement companies, investors have many options in other sectors that are likely to deliver better returns than the cement industry.

 

About the Author

Ketan Sonalkar (SEBI Rgn No INA000011255)

Ketan Sonalkar is a certified SEBI registered investment advisor and head of research at Univest. He is one of the finest financial trainers, with a track record of having trained more than 2000 people in offline and online models. He serves as a consultant advisor to leading fintech and financial data firms. He has over 15 years of working experience in the finance field. He runs Advisory Services for Direct Equities and Personal Finance Transformation.

Note – This channel is for educational and training purpose only & any stock mentioned here should not be taken as a tip/recommendation/advice

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