Stock Review: ACC & AMBUJA CEMENTS

The stocks of the two leading cement players, both Holcim-controlled, ACC and Ambuja Cements have sharply underperformed the broader market over the past three months. And that's because investors are increasingly nervous on the outlook for this sector, given a rapidly rising cost structure. Further, the onset of monsoon, there is typically a slackening in demand from key user industries.

At Monday's close of . 954.5, the ACC stock has declined nearly 14.5% during the past three months compared to a 4.5% fall in the Sensex. Similarly, Ambuja Cements, too, has fallen 12.6% during this period. The two key input costs for the cement industry, namely power and fuel, coupled with freight charges have seen an upward trend, on a pertonne basis. In the case of power and fuel costs, cement companies have been grappling with a near 30% rise in coal prices, for supplies from Coal India, since end February, say analysts. Also, imported coal prices are up nearly 20% y-o-y in the quarter under review. In the case of freight charges too, earlier hikes in retail fuel prices are expected to push up cost overheads in the first quarter of FY12. The rise in input costs is expected to lead to a fall in operating margins of cement companies on a y-o-y basis in the June '11 quarter, despite an estimated rise of 3-3.5% in cement realisations on a per-tonne, all-India-basis in the quarter.

These input costs, as a percentage of ACC's consolidated net sales in the March 11 quarter, had risen 250 basis points y-o-y to 31.9%, hitting the the company's operating margins. For the June '11 quarter, as per ETIG estimates, ACC is expected to report an 12.5% y-o-y fall in net profit, despite a 17% rise in net sales, given cost pressures. In the case of Ambuja Cements too, it is expected to report a 13.9% y-o-y decline in its net profit in the quarter under review. In the June '11 quarter, ACC dispatches grew 11.8% y-o-y to 5.96 million tonnes, helped by its recently expanded facilities at Wadi, Karnataka and Chanda, Maharashtra. Ambuja Cements' dispatches, however, fell 3.3% yo-y . ACC trades at a consolidated P/E of 17.3 times on a trailing four-quarter basis, and is rather expensive. Similarly, Ambuja Cement trades at 16.4 times and the upside in the short-term appears limited.