Domestic brokerage house Motilal Oswal (MOSL), recently, downgraded the cement major ACC after the firm posted a 60 percent drop YoY in its net profit in the June quarter of 2022 (Q2CY22). Its net profit fell to ₹227 crore in Q2 versus ₹569 crore in the same period last year. The company follows January-December financial year.
Its total revenue from operations during the quarter under review, however, rose 15 percent to ₹4,468.42 crore in Q2 as against ₹3,884.94 crore in the year-ago period.
The stock's performance has been muted in 2022 so far. It has lost 3 percent this year against a 7 percent decline in Indian markets.
Motilal Oswal said that ACC’s Q2CY22 result was weak as expected, though, the company met its muted expectations with EBITDA declining 51 percent YoY to ₹4.25 crore due to cost pressures. EBITDA/t also dipped 56 percent YoY to ₹563, it added.
Post the earnings, MOSL downgraded the stock to 'neutral' from 'buy' earlier and cut the target price of ₹2,260, indicating a potential upside of only 5 percent.
"ACC trades at 12x CY23E EV/EBITDA (in line with its 10-year historical average) and leaves little room for upside," said the brokerage.
It further noted that its earnings are expected to come under further pressure in the current quarter Q3CY22 led by rising raw material costs. The company witnessed a surge in overall costs of production as compared to previous quarters which impacted its bottom line in the reported quarter.
MOSL further cut its EBITDA estimates for ACC by 7 percent and 4 percent and EPS estimates by 9 percent and 4 percent for 2022 and 2023, respectively. It also estimates ACC’s EBITDA and profits to decline at a CAGR of 4 percent and 6 percent over CY21-23, respectively.
The growth plans and cost-saving strategies by the new management will be the key triggers for stock performance, MOSL highlighted.
Despite the weak results, another brokerage Phillip Capital maintained a 'buy' call on the stock with a target price of ₹2,600, indicating an upside of 20 percent.
When Adani Group announced a buy-out of Holcim’s stake in ACC Ltd and Ambuja Cements, the brokerage noted that it categorically said that it expects huge structural improvements at both these companies. It sticks to the same in the most recent note as well.
"We have been constantly doing intense ground checks to validate our assumptions. Our ground checks suggest an increased risk of rising inefficiency in the next few quarters at ACC and therefore a muted performance by ACC. Having said that, the structural long-term arguments continue to hold true. To be noted here, these risks will have industry-wide implications too!" the brokerage explained.
It added that it expected ACC (relative to peers) to report a muted performance in Q2CY22, therefore, this muted performance is not
really a negative surprise! Having said that, until the Adani Group’s buy-out of the stake of Holcim in ACC Ltd and Ambuja Cements is completed, it sees this trend of muted performance at both these companies to continue.
But then, regarding this particular proposed transaction, the brokerage also predicts huge structural opportunities at ACC Ltd to unfold (slowly and steadily) as and when the transaction completes.
However, building in these risks, the brokerage also cut its EBITDA estimates for the firm by 21 percent and 11 percent for CY22 and CY23, respectively.
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