ACC’s margins plunge on falling realisations

ACC’s margins plunge on falling realisations
Published: 22 October 2010

Cement maker ACC Ltd’s performance for the September quarter was much below expectations. The stand-alone entity’s net profit plunged by 77 per cent YoY to INR100 crore. That was half of what analysts had estimated, as the firm took a beating on both price realisations and costs. ACC’s net sales fell 16.9 per cent YoY to INR1637.2 crore, mainly due to a 3.7 per cent contraction in despatches to 4.8Mt.

Weak market conditions and lower cement prices, especially in the west and south where ACC has a substantial presence (about 32 per cent of sales), also impacted revenues.

Analysts had estimated lower revenue for the industry as both infrastructure and real estate growth was subdued during the quarter. ACC also stated that the shutdown of one of its units (Wadi-II) for expanding capacity also contributed to lower output. Price was a key factor. Realisation per tonne dropped about 14 per cent YoYand 12 per cent per cent QoQ to INR3390 during the quarter.

Though cement prices were increased in September, it has clearly not been enough to help improve quarterly realisations.

The combination of falling output and prices, accompanied by rising costs, contributed to a steep drop in operating profit margin to 13.5 per cent from 29.4 per cent in the June quarter and 35.7 per cent a year ago.

"Costs spiralled on most fronts, both in absolute terms and as a percentage of sales," says Ajay Parmar, head (institutional research) at Emkay Global Financial Services Ltd. Raw material costs as a proportion of sales almost doubled on a YoY basis to 19.6 per cent, led by increase in slag and fly ash prices. In addition, the firm took a beating on power and fuel, and employee costs, which jumped y-o-y by 400 and 210 basis points, respectively.

The declining profitability of the business is reflected in the consistent drop in ACC’s operating profit per tonne-it is down from INR1400/t a year ago, to INR459/t in the September quarter. Some analysts reckon this is close to the cyclical lows that were visible in 2005. ACC’s shares fell during the day, after the results were announced, but ended up 1.5 per cent higher on the Bombay Stock Exchange at INR982.60 apiece. Perhaps, markets are interpreting the September hike in cement prices as a signal that the worst is over. However, more capacities will come on-stream, adding to market supply in 6-12 months. Whether the price increases can sustain, even when that happens, is the moot question.