The cement industry is facing decent growth prospects in the next few years but pricing is at the bottom now. The industry-wide consolidation phase is ongoing along with organic growth. The additional volume and lower prices have compelled players to address cost efficiency and plant modernisation, long-term tailwinds for the sector and the company.
Despite the support and recent market correction, we recommend investors hold ACC, a subsidiary of Ambuja Cements and part of Adani Cement. Investors must monitor the impact on sales and margins from group company operations, which impacted Q3FY25 earnings before turning positive on the stock.
The stock is trading at low valuations of 9 times EV/EBITDA and also around the replacement value of $90 per tonne.
Financials
The company has reported revenue growth of 7 per cent year-on-year in Q3FY25 as volume expanded 20 per cent and realisations declined 11 per cent. While organic volume growth could be around 4-5 per cent, the additional volume growth was from MSA (Master Supply Agreement) where materials and services between group companies (Ambuja Cements, Penna Cement, Sanghi Cement, Orient Cement and Asian Concretes and Cements) are exchanged at arm’s length for optimal group outcome. The trading-like operation of purchasing from sister concerns and sales under ACC brand may have impacted EBITDA margins, which were at the lowest level in the quarter. The cost of raw materials and purchases increased 29 per cent year on year in Q3FY25 and 15 per cent in Q2FY25, which likely points to cost-plus mark-up purchases from group companies. In Q3FY25, the raw material cost per tonne for the consolidated Ambuja Cements increased 9 per cent.
ACC reported EBITDA of ₹370 per tonne compared to ₹700 in the preceding four quarters as a result of the purchase and sale apart from lower realisations of cement. With turnaround in acquired assets of Penna, Sanghi and Orient, higher utilisation and implementation of cost-efficiency measures, the MSA impact should decline. The company has also reported ₹720 crore of incentives from the government as part of the capex expansion which, if included, pushes the EBITDA to 1,042 per tonne. While not part of operations, this benefit could be recurring for the next few years, as per the company.
Industry metrics
Cement volume growth in the country in 9MFY25 has been tepid at 1.5 per cent year-on-year owing to elections, the monsoon and strong uptake in earlier years. This is echoed in other core industries of steel and infrastructure as well. But over a long term, there is structural support to strong demand. A renewed government push on rural housing, buoyant commercial real estate with low inventories, infrastructure capex maintained at ₹11 lakh crore that covers road and infrastructure building. This is expected to support a 7-8 per cent volume CAGR in the next five years.
The ongoing slump in cement prices has lasted more than two years now at 7.5 per cent per year, indicated by ACC’s average realisations. The industry has managed a price hike in December 2024, which should take hold in the following quarters. With the recovery in demand as mentioned, the prices are strongly expected to reverse the trend. There is the consolidation factor as well. Of the 450 million tonnes per annum (mtpa) consumed in India, close to half is under two players now, owing to a consolidation phase in the last two years – 140 mtpa for UltraTech and 100 mtpa for Adani Group. The need to fetch returns on the acquired volumes and the concentrated position pan-India should allow for a better price hike especially on the current low base.
Cost drivers
The cost drivers for ACC are operating leverage from higher volume and actual cost efficiency investments. At the conglomerate level, Ambuja Cements expects to increase its capacity to 140 mtpa by FY28 from 75 mtpa in FY22 when the two entities were acquired by Adani Group — a CAGR growth of 11 per cent. This includes expansion at ACC as well and in the last two years, volume growth has been at 17 per cent CAGR, taking it to 40 mtpa in the current capacity. The company should have an operating capacity of 47 mtpa in the next two years as per analysts’ expectations (not including the MSA volumes).
Equally big delta in operations is from the group’s focus on energy and freight costs, which are likely to trickle down to ACC, a positive from consolidated operation. At the group level, renewable energy of 1,000 MW is being developed at a total cost of ₹6,000 crore and 200 MW is operational in Q3FY25. Waste heat recovery system (WHRS) is expected to account for 200+ MW in the next few years. Together, renewable energy and WHRS are expected to deliver about 60 per cent of the power for the entire 140 mtpa planned capacity by FY28. The company is also bidding for coal mines through auctions to secure coking coal. For freight, the group is targeting a reduction in lead distances (distance travelled to deliver cement borne by the company) by 100 km by optimising warehouses, rail-road mix and digitalised management. The group is acquiring rail rakes under the government scheme and exploring shipping lanes to deliver reduction in freight costs.
The two heads are expected to deliver cost savings of ₹500 per tonne in the next two years. In Q3FY25, ACC reported total cost of ₹4,500 per tonne. This implies a 10-12 per cent reduction in cost from the current position. The total cost of production has declined 8 per cent in the last two years, and can further reduce from here based on the above measures.
Valuation
Owing to the market-wide correction, weak results in the previous quarter and low cement realisations, the stock has declined 30 per cent from its recent peak on February 16, 2024. The company is now trading at an EV of around $90 per tonne, which is lower than recent acquisitions — $113 per tonne for Orient Cements, Kesoram Cements – $80 per tonne and Penna Cements – $89 per tonne. The strong growth and cost-saving prospects should support the stock, but improved margins without impact from cement resale operations are necessary for a turnaround.