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Growth prospects to keep investors in ACC, Ambuja

Ambuja posted a net profit of Rs 499 crore against Bloomberg’s estimate of Rs 333 crore.

, ET Bureau|
Jul 26, 2018, 08.53 AM IST
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cement-BCCL
ET Intelligence Group: Multi-year low valuations and better-than-expected financial performance in the June 2018 quarter have been the key reasons for the 6-12 per cent rise in the stock prices of ACC and Ambuja Cements in the past three trading sessions.

In the June 2018 quarter, ACC surprised the Street with about 5% higher realisations on-quarter at Rs 4,761 per tonne against estimates of flat growth. Also, the company recorded an EBIDTA per tonne of Rs 810, a six-year high.

Similarly, Ambuja posted a net profit of Rs 499 crore against Bloomberg’s estimate of Rs 333 crore. The company also scored well on revenue estimates. Against Bloomberg’s consensus estimate of Rs 2,940 crore, Ambuja recorded revenue of Rs 3,020 crore.

In the coming quarters, two key variables would sustain investor interest in both companies. These are volume growth and pricing. Analysts are likely to monitor how well both companies would be able to raise cement prices as and when demand picks up across key markets. Besides, they are likely to keep a tab on how both companies fare on volume growth in comparison with their large peers.

Also, any development related to expansion of capacity either organically or inorganically would be instrumental in triggering analyst interest, which would result in re-rating of these two stocks. ACC has a capacity of 33 MT, while after expansion in the next two to three years, Ambuja Cements capacity will also touch 33MT. Analysts point out that both companies have not announced any concrete plans of incremental expansion in the past few years. Hence, a lot would depend on how efficiently these two companies sustain such superior performance, especially in the next one or two quarters.

A key factor that works in their favour is their attractiveness of valuation with respect to large-sized peers. Based on FY19 estimated earnings, ACC and Ambuja Cements are trading at EV/EBIDTA of 10.8 and 8.3. Its large-sized peers are trading at average EV/EBIDTA of 16.9 based on FY19 earnings.

ACC and Ambuja have not shown adequate aggression, like their larger peers, to create capacity and gain handsomely when demand improved. Hence, both stocks lagged their peers in price appreciation. Given these factors, analysts would be closely observing how both take advantage of superior volume growth, higher utilisation, and better cement pricing.

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