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Business News/ Market / Mark-to-market/  ACC, Ambuja Cements: costs negate benefits of higher cement prices
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ACC, Ambuja Cements: costs negate benefits of higher cement prices

Although both firms sold more cement at higher prices, costs, too, moved up compared with the year-ago period

Although strong cement prices and demand recovery make an optimistic case for investment in cement stocks, ACC may see higher expansion in profitability in the near to medium term. Photo: BloombergPremium
Although strong cement prices and demand recovery make an optimistic case for investment in cement stocks, ACC may see higher expansion in profitability in the near to medium term. Photo: Bloomberg

Holcim Ltd’s cement companies ACC Ltd and Ambuja Cements Ltd posted a similar trend in the June quarter. Although both firms sold more cement at higher prices, costs, too, moved up compared with the year-ago period. That affected operating profitability, which came in below expectations.

Within these parameters, surprisingly, Ambuja Cements painted a better picture both in revenue and profit growth. Net revenue growth at 15.4% year-on-year outstripped that of ACC, which clocked a lower 7.6% growth. Given that nearly a fourth of ACC’s revenue comes from the south, which posted the most vibrant growth in cement prices among all other regions in the country, net realization per tonne of cement sold for Ambuja Cement (with no southern presence) was higher at 7.3% when compared to ACC at 3.8%. Even in volume terms, Ambuja posted a higher growth rate despite ACC being a pan-India player.

Sustained upward trajectory in cement prices in the last few months, especially in the south and west where ACC has a strong presence, lifted the quarter’s performance. Dealers suggest that cement prices rose the highest in the south—as much as 50/bag in the month of May-June, compared with 15-20/bag in most other regions. ACC’s net revenue rose by 7.6% from the year-ago period, backed by a 3.7% growth in sales volume and 3.8% higher realization per tonne of cement sold.

However, costs seem to have weighed down on both companies. ACC’s media statement said that manufacturing and distribution costs continued to escalate. Freight costs rose for both firms, but Ambuja Cements had a higher increase in power and fuel costs from the year-ago period, in absolute terms. Cost increases were mirrored in operating margins, which were below expectations in both cases. Ambuja Cements’ operating margin at about 21.2% was flat from a year ago. ACC’s fell by 220 basis points to 13.3%. One basis point is one-hundredth of a percentage point.

Kotak Institutional Research, in its preview note on cement companies released a few weeks ago, highlighted that inflationary pressures would rein in June quarter operating profit per tonne at lower levels than the year-ago period.

Ambuja Cements’ net profit (after tax credit adjustments) was in line with Bloomberg’s consensus estimates. At 386 crore, it was 19% higher than the year-ago period. Even reported profit was 26% higher. However, ACC’s stand-alone net profit at 241 crore was 7% lower.

Emkay Global Financial Services Ltd said that ACC’s initiatives to improve clinker consumption ratio along with waste heat recovery plants should help the company improve its cost structure. “We expect a likely cost savings of 145-195/tonne at the manufacturing level which alone could improve ACC’s competitiveness and margins." This could be one reason which makes ACC more attractive from an investor stand-point—there is room for margin expansion.

Besides, brokerages reckon Ambuja Cements stock at 218.3 enjoys higher enterprise value per tonne than its counterpart whose shares trade at 1,460. Hence, although strong cement prices and demand recovery make an optimistic case for investment in cement stocks, ACC may see higher expansion in profitability in the near to medium term.

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Published: 24 Jul 2014, 09:04 PM IST
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