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Covid-19 May Delay ACC, Ambuja Capex Plans

Not only volumes of ACC and Ambuja Cements fell during Q1, but their capex plans may also get delayed amid lockdown.

A construction worker holds a trowel of cement as he lays bricks (Photographer: Simon Dawson/Bloomberg)
A construction worker holds a trowel of cement as he lays bricks (Photographer: Simon Dawson/Bloomberg)

The two Indian cement units of LafargeHolcim Ltd. faced twin troubles in the quarter ended March as the new coronavirus pandemic stalled economic activity and disrupted trade.

Not only the volumes of ACC Ltd. and Ambuja Cements Ltd. fell, but their capital expenditure plans are also likely to be delayed because of the world’s harshest lockdown to contain the highly contagious pathogen. While the disruption from the pandemic will hurt demand for cement in the short term, adding capacity is important for the Swiss group’s Indian arms to consolidate position in the east, better compete in the northern and central regions and optimise costs.

Motilal Oswal said in a note that ACC is expanding its capacity by 18 percent, most of it in central India. That should get commissioned only by calendar year 2022, a delay of six to 12 months due to the Covid-19 outbreak.

According to Narnolia Research, Ambuja Cements may delay its 4.5-million-tonnes-per-annum capacity expansion at Marwar Mundwa, Rajasthan as the existing capacity will remain unutilised due to the prevailing situation.

This expansion, according to Morgan Stanley, is now expected to complete by the first quarter of 2021 against an earlier forecast of before 2020-end.

The capacity expansion by ACC and Ambuja Cements was aimed at consolidating their position in the eastern region while trying to catch up with market leader Ultratech Cement Ltd. in the north where the two LafargeHolcim subsidiaries have lost momentum. Any delay in capex plans will also offset other benefits that the two companies expected after the expansion.

The new plant at Marwar Mundwa, Morgan Stanley said, would provide Ambuja Cements logistical advantage and improve its cost structure. According to Motilal Oswal, ACC’s expansion in central India would have addressed investors concern on the potential market losses due to output constraints in the region, which has better utilisation outlook than the rest of India.

Ritesh Shah, analyst at Investec Capital Services, however, pointed out that LafargeHolcim, parent of the two Indian listed mills, called for “disciplined capex” and not “deferred capex”. The brokerage doesn’t expect any delay in commissioning of Ambuja Cements’ expansion plans, barring may be a couple of months, which could be attributed to Covid-19-led disruptions.

To be sure, the cement makers didn’t mention anything about a delay in capex plans in their investor presentations. BloombergQuint awaits response to emailed queries.

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Operational Performance

ACC’s volumes declined 12.5 percent year-on-year, while Ambuja Cements reported a 9.7 percent drop in the quarter ended March, according to their media statements. Higher sales of premium products cushioned the fall for Ambuja Cements in the first quarter, it said. Still, both the cement makers—which follow January-December financial year—managed to meet the analysts’ estimates.

ACC and Ambuja Cements reported better-than-expected operational performance.

Lower fuel cost, plant efficiency and supply chain optimisation helped Ambuja Cements beat estimates, according to its statement. The company’s power and fuel cost per tonne fell 12.2 percent over the last year to Rs 975 during the first quarter. ACC’s performance, Motilal Oswal said, was supported by lower raw material costs.

Yet, one distinguishing factor remains between the earnings of the two companies: realisations, or average selling price per unit.

While ACC’s realisations remained flat during the quarter, Ambuja’s increased, led by higher sales of premium products and no exposure in the southern region where prices fell.

Higher exposure to northern and western regions resulted in better-than-expected pricing growth for Ambuja Cements, according to Nirmal Bang’s research note.

Analysts’ View

While most analysts have a bullish rating on ACC and Ambuja Cements, they see a negative impact on 2021 volumes as recovery and normalising of economic activities will take time even after the lockdown is completely lifted.

There are 35 ‘buy’ calls on ACC, five analysts recommend ‘hold’ and two ‘sell’. For Ambuja Cements, the number of ‘buy’ ratings stand at 31, ‘hold’ at 9 and only one analyst suggest ‘sell’. The Bloomberg consensus 12-month return potential for ACC is 23.5 percent and Ambuja Cements is 18.2 percent.

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