Whalesbook
Profits Fall Despite Record Sales as Costs Bite
ACC Ltd's net profit for the fourth quarter fell 68.3% year-on-year to ₹238.3 crore, down from ₹751 crore. This occurred despite a strong 18% rise in revenue to ₹7,125 crore and a record quarterly sales volume of 11.9 million tonnes. The higher sales did not lead to increased profit because operating performance weakened. Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) dropped 19.9% to ₹605 crore, and profit margins narrowed to 8.5% from 13% a year earlier. The company blamed higher fuel and diesel costs, limited packaging supplies, and a weaker rupee for the margin squeeze. These cost pressures are expected to continue into the first half of fiscal year 2027.
Merger Aims to Boost Efficiency Amid Cost Pressures
The Adani Group is combining ACC with Ambuja Cements to create a single 'One Cement Platform.' This merger is expected to improve operations and cut costs, potentially saving ₹100 per tonne through larger-scale buying, manufacturing, and distribution. These efficiencies are needed to fight rising input costs, which have hurt ACC's profits. Industry analysts like HDFC Securities forecast that energy costs could rise by ₹200-300 per metric ton and packaging costs by ₹100 per ton, increasing total production costs by ₹150 to ₹200 per tonne. These price hikes are driven by global events affecting fuel and materials. Although cement prices have increased slightly, the market has too much supply and limited room to raise prices further, making it hard for companies to cover the higher costs. ACC's stock valuation (P/E ratio around 9.5-12.3) is much lower than rivals like UltraTech Cement (P/E ~41.36) and Shree Cement (P/E ~48.74). While ACC has no debt and a good return on capital employed (ROCE) of 17.44% (compared to UltraTech's 12.78%), its lower stock price may reflect investor doubts about its ability to turn its size into consistent profits, which the merger intends to fix.
Concerns Remain Over Profit Quality and Merger Timeline
Despite record sales, ACC's profitability has significantly weakened, with its operating margin of 8.5% falling far below the 21-23% expected for merged cement operations by some analysts. Past results have also shown that one-time gains sometimes boosted reported profits. For instance, in Q3 FY25, net profit adjusted for refunds and interest reversals actually fell 57%. This raises questions about how reliable ACC's earnings are. MarketsMojo gave ACC a 'Sell' rating in September 2024, pointing to falling profits and an operating margin at a five-quarter low. While the merger with Ambuja Cements offers potential for greater scale and savings, the ongoing cost inflation and ACC's past challenges in matching peers like UltraTech mean the merger's full benefits might take time to appear.
Analyst Outlook Mixed Amid Integration and Market Challenges
Analysts have a mixed view on ACC's future, with a consensus 'Moderate Buy' rating and an average price target of ₹1,917.00, suggesting possible stock growth. However, forecasts predict earnings per share may decrease over the next three years, with revenue growth expected to trail the wider Indian market. Key factors for ACC's future performance will be how well it integrates with Ambuja Cements and whether the market can handle higher cement prices despite ongoing cost increases and oversupply. Regulatory approval for the merger is anticipated by fiscal year 2027, a key step in the Adani Group's plan to become a major cement producer.