Stock in Actions: ACC Ltd

Movement of the Day:

Analysis:

Strong Momentum: Price above short term, medium term and long term Moving averages from 5 to 200 SMA.

Probable Rationale behind the surge (Recent Deal & Finance):

In a noteworthy development, Sanghi Industries has announced plans to market its cement under the well-established ACC brand, marking a significant shift in its business strategy. This decision comes on the heels of the Adani Group subsidiary Ambuja Cements acquiring a majority stake in Sanghi Industries in August 2023.

The financial landscape of ACC Limited, the parent company, also tells a compelling story. According to the latest reports, ACC Limited witnessed a remarkable turnaround in its fortunes, reporting a consolidated net profit of Rs 387.88 crore for Q2FY24.

Examining the financials in detail, the revenue from operations for Q2FY24 stood at Rs 4,434.73 crore, marking an impressive 11.22% increase year-on-year. However, there was a quarter-on-quarter dip of 14.47%, attributed to a revenue of Rs 5,201.11 crore in Q1FY24. The total income for Q2FY24, reaching Rs 4,644.78 crore, showcases a substantial 14.48% rise from the previous year. Nevertheless, on a quarter-on-quarter basis, there was a marginal decline of 11.99%, standing at Rs 5,278.02 crore in Q1FY24.

Interestingly, these financial dynamics could offer insights into the surge in ACC Limited's stock, which was trading at Rs 1,883.75 at 1:52 pm. The strategic move by Sanghi Industries to align its cement offerings with the ACC brand, coupled with the positive financial performance of ACC Limited, likely generated increased investor confidence.

As investors look for stable and promising opportunities, the convergence of Sanghi Industries with the renowned ACC brand seems to be a strategic step, contributing to the positive trajectory of ACC Limited's stock. This alignment not only signifies a shift in branding but also reflects a broader strategic vision that has resonated well with the market. As the market continues to react to these developments, it's evident that the Sanghi-ACC synergy is a key factor influencing the financial market's sentiment.

Cash & Cash Equivalent for the last five quarters

(Source: AR) (Amount in ₹ Cr.)

Analysis: The decrease in ACC's cash under Holcim ownership suggests capital allocation towards larger projects or debt reduction. The 'New Promoter' signifies a strategic shift with consistent annual increases, indicating a focus on liquidity, risk mitigation, and financial stability. The cash growth of around 11,721 Cr INR implies enhanced flexibility for the company, enabling quick responses to market dynamics or potential growth opportunities. Overall, the change in cash trends reflects differing financial strategies and priorities under the two ownership structures.

Financial Statement Position

Key Reason for Change:

1. Net Fixed Assets: Ametha Capitalisation of Clinker unit - Rs.1106 Crs. (Capitalistion of GU and WHRS will be done once COD is achieved)
2. Non-Current Assets: Capital advance for Bhatapara, Maratha, Sankrail.
3. Net Working Capital: Inventory and Trade Receivables.
4. Equity & Net worth: Profit after tax for 6 months; less Dividend paid of Rs. 585 Crs.
5. Non-Current Liabilities: Right of Use for Assets taken on Long Term Lease.
6. Other Liabilities: Security Deposits from customers & Liability for Capital Expenditure.

The Cement Business

(Source: AR)

Analysis:    

1. The consistent annual increase in sales volume and revenue for ACC signifies robust demand and effective pricing strategies in the cement business. 
2. The substantial surge of over 303% in EBITDA and a 290% increase in EBITDA excluding other income reflect operational efficiency and cost management, contributing significantly to the company's profitability. 
3. These positive trends suggest ACC's effective market positioning and operational excellence, translating into strong financial performance and growth potential in the cement sector.

Mcap to Sales:

Analysis:

A decreasing MCap/Sales ratio for ACC suggests that the market is valuing the company less relative to its sales. When the ratio is just slightly above the 5-year median MCap/Sales, it indicates that the current market valuation is somewhat in line with the historical average over the past five years. 
This suggest that investors perceive ACC's sales performance in the present to be less attractive than in the past, or that expectations regarding future revenue growth may be more subdued.

Strength:

1. Strong Market Position:
ACC and Ambuja jointly hold 12-13% of the domestic cement market, boasting a total installed capacity of 67.5 MTPA. Their extensive infrastructure and nationwide presence insulate operations from regional market fluctuations.

2. Healthy Operating Efficiencies:
With a strategic focus on high blended cement (88%) and captive power sources, ACC maintains a healthy operating margin (13.1% EBITDA) as of March 2023. Plans to enhance the power mix aim for sustained superior operating margins.

3. Strong Financial Risk Profile:
ACC exhibits financial robustness with a reported net worth exceeding Rs 30,000 crore and Rs 11,886 crore in cash and equivalents as of June 30, 2023. Being debt-free ensures strong debt protection metrics.

4. Large Capex and Funding Strategy:
Despite a substantial consolidated capex of nearly Rs 22,000 crore planned for 2024-2025, ACC aims to fund these initiatives through internal accruals and existing liquidity. This proactive approach underscores the company's commitment to maintaining financial strength.

5. Strategic Warrants and Share Issuance:
The strategic issuance of share warrants in October 2022, amounting to Rs 20,000 crore, aligns with ACC's commitment to minimizing reliance on debt for capital expenditure. The receipt of Rs 5,000 crore towards these warrants reflects a prudent financial strategy

Concern:

1. Vulnerability to Market Fluctuations:
The cement industry's unpredictable capacity additions during peak cycles lead to unfavorable price swings. The susceptibility to volatility in input prices, such as raw materials and energy costs, further impacts profitability. 
The recent spike in pet coke prices has notably affected the overall financial performance of cement players. Demand-supply dynamics and regional factors also influence realizations and profitability, introducing inherent cyclicality and risk. Although cost reduction initiatives are in place, these factors remain a challenge.

2. Liquidity Concerns:
While ACC maintains superior liquidity without external debt, Ambuja's standalone liquidity is notable. Cash and equivalents for ACC and Ambuja were Rs 3,096 crore and Rs 8,634 crore, respectively, as of June 30, 2023. 
However, on a consolidated level, robust cash accrual of over Rs 5,000 crore per fiscal is anticipated over the medium term. This, along with expected equity infusion, is projected to cover the capex requirements. Despite this, careful monitoring is essential to ensure sustained healthy liquidity in the face of potential uncertainties.

Outlook:

If the given information were to believes, ACC will maintain its strong financial risk profile over the medium term, supported by healthy cash accrual and low reliance on debt.