ACC Vs UltraTech Cement: Which Cement Stock is Better?

So it is no surprise that India is the second most populous country in the world as well as the second largest producer of cement.

According to the Cement Manufacturers Association, India’s total installed capacity is 540 million tonnes. The top five players control half of the country’s production.

In today’s article we Compare and differentiate the two top cement players, UltraTech Cement and Acc. The idea is to study their past, eliminate risks and profit from their future.

background

ACC: ACC is one of the oldest cement companies in India with a rich history. It was purchased in 2004 by the Swiss based Holcim Group, the world leader in cement.

It has a total installed capacity of 30m tonnes and an annual output of mt. ACC has a market share of 10% in India.

UltraTech Cement: Over the past decade, UltraTech Cement has evolved from organic and inorganic forms. It has almost doubled its capacity to 100m tonnes.

The company has a market share of 25 per cent.

The Aditya Birla Group cement giant grew aggressively after absorbing Grasim’s cement business in 2010. This made it the largest cement company in India.

Both ACC and UltraTech Cement operate cement plants in all regions of India. Now this augurs well for a cement company. The logic behind this is simple. It is not economical to transport cement remotely. This makes the business quite regional.

Exposure to a single market makes a company vulnerable to price fluctuations in that sector. But ACC and UltraTech, unlike their smaller peers, operate plants in multiple regions.

Therefore, if the market in one part of the country does not perform well, gains from other markets help to mitigate it.

capacity and production

Construction activity across the country is the primary driver for any increase in cement demand. This includes not only housing projects in urban and rural areas (65% of the total demand for cement), but also infrastructure activities such as construction of roads, bridges, highways, metros, etc. (the remaining 35%).

increase in revenue

UltraTech’s 5-year compound annual growth (CAGR) revenue has tripled compared to ACC. The drive comes on the back of massive capacity expansion coupled with huge demand for housing and infrastructure projects across the country.

profitability

A cement company’s profitability is best reflected in its earnings before interest depreciation tax (EBIDTA per tonne) per tonne. Simply put, it is the profit from core operations (before interest and depreciation) on each tonne of cement sold by the company.

A high level of profitability is usually the result of two things; Either the company operates in highly profitable sectors or it maintains tight control over its costs.

While UltraTech and ACC enjoy captive resources for raw materials and power supply, ACC’s operating costs have always been high. The primary reason is its old plant and machinery. These often require unexpected maintenance. This affects the operating profit of the company.

In contrast, UltraTech’s plant and machinery is relatively new, which is driving it. Furthermore, both the companies are equally adept at reining in their costs.

Even though ACC operates plants across the country, a major part of its cement plants are in the southern region of India. Due to excess cement capacity in South India, the supply-demand dynamics there have been generally unfavourable for cement producers.

For ACC, this southern exposure in conjunction with an uncertain cost structure has impacted the company’s profitability.

Dividend

Dividend is the income that an investor can earn from shares in addition to the increase in the value of the stock.

Due to the capital intensive nature of the business, cement companies are not dividend payers. This is reflected in the five-year average dividend yields for ACC Cement and UltraTech Cement: 0.6% and 0.5%, respectively.

This ratio measures the level of debt a company takes on to finance its operations or expansion against the level of equity available.

Generally, a favorable debt-to-equity ratio is less than 1.0, while a risky debt-to-equity ratio is greater than 2.0.

While ACC enjoys debt-free status, UltraTech has borrowed funds for its massive expansion over the past decade. But assuming that it has been less than 1 and is falling, it does not raise a red flag.

Return on Capital Employed (ROCE)

Return on capital employed is one of the most meaningful indicators of a company’s profitability and efficiency.

It is an excellent tool for analyzing the returns of a capital intensive industry like cement. It tells you what a company generates on the total capital it invests (shareholders’ equity plus borrowed funds).

The 5-year average for ACC is higher than for UltraTech. While this usually means that the ACC is generating higher returns by efficiently employing its capital, in this case, it may be different.

UltraTech’s new capacity addition is yet to generate substantial profits, affecting its return on capital employed at present. But over the next few years, as new capacity becomes profitable and reduces the amount of money borrowed, this number must increase.

Evaluation

The most common and effective ratios for comparative analysis and valuation are the price-to-earnings (PE) and price-to-book (PB) value ratios.

The PE ratio uses a company’s earnings to determine the rupee value of a shareholder’s earnings. The PB ratio uses a company’s book value to determine this.

The PE and Pb ratios for ACC are 20.4 and 3.2, respectively. The average for the last 10 years is 25.9 and 2.9 respectively.

PE and PB for UltraTech Cement stood at 31.5 and 4.6, respectively. The ten year averages are 32.4 and 3.8 respectively.

Both companies are trading at a premium to their 10-year averages, indicating that the shares are currently priced higher.

sustainability efforts

Climate change is one of the most serious issues facing humanity today. Governments around the world are grappling with the issue, forcing companies to become more environmentally friendly. An important step in this direction for companies is to reduce their carbon emissions.

Carbon emissions in cement companies are measured in terms of kilograms per ton of cemented material. Both ACC and UltraTech stand at 493 kg per tonne and 462 kg per tonne of cemented material. Most of the carbon emissions associated with cement occur during production which is resolved using alternative components such as fly ash and slag.

Getting energy from renewable sources is another helpful step towards sustainability. 13% of UltraTech’s energy requirement is met through renewable energy capacity, while 4% of ACC’s energy requirement is met through renewable energy capacity.

UltraTech is 3.9 times water positive, meaning they return 3.9 times the amount of water to the community. The ACC is currently 1.1 times and is targeted to be 5 times by 2030.

bright prospects

Despite being the second largest cement producer in the world, India’s cement consumption per capita is 235 kg.

This number is lower than the global average of more than 500 kilograms per capita. So there is a lot of room for growth going forward.

The cement industry has witnessed massive capacity expansion over the past decade while the demand for cement remains sluggish. Historically, the ratio of growth in cement demand to GDP growth has been around 1.2x. But due to slowdown in infrastructure projects, this ratio has been much lower than the previous average.

Despite this excess supply, margins have not declined significantly. This is due to consolidation in the industry. The top 5 players control about 50% of the market. This number is much higher at the regional level.

However, with the rise in small and medium-sized cement players, the industry leaders are likely to lose their bargaining power.

Equitymaster’s opinion

We reached out to Tanushree Banerjee, co-head of research at Equitymaster, for her views on cement companies. Here’s what he had to say…

Though cement companies have benefited from a quick recovery in the realty sector, cost pressures have kept their margins weak for some time.

Cement companies may see some margin pick-up in the next few quarters due to easing of cost pressures.

At the same time, cement companies in India continue to be strong beneficiaries of megatrends in infrastructure and corporate capex.

ACC or UltraTech: which is better?

ACC is working with its parent company Ambuja Cement to maximize its production capacity and benefit from operational and financial synergies. But it remains to be seen how beneficial these measures will be.

Recording strong revenue and production growth along with high operating margins, UltraTech has been operating more efficiently than it has been in years.

After massive expansion, UltraTech Cement is better positioned to capitalize on the growing demand as compared to its peers.

But with the recent rally in stock prices in the cement sector, both the companies seem to be overvalued.

Before choosing a stock to invest in, take a look at each of the company’s fundamentals and valuations. They help in deciding which company is better for investment.

Still confused which one is better?

Use our feature-rich comparison tool to make a detailed comparison between any two companies. The tool also includes a graphical analysis to make it easy for you to spot trends!

ACC Vs UltraTech Cement

As the cement sector stocks you are interested in, check out Equitymaster’s powerful Indian stock screener tool to find out the top cement companies in india,

Disclaimer:This article is for informational purposes only. This is not a stock recommendation and should not be treated as such.

This article is syndicated from equitymaster.com