ACC Ltd Q2 FY26: Margin Pressures Persist Despite Revenue Growth

The stock closed at ₹1,884.85 on October 31, 2025, reflecting a 1.39% gain for the day. However, the broader picture remains challenging, with the stock down 18.48% over the past year, significantly underperforming both the Sensex (+5.92%) and the cement sector (+6.43%). The company's current "HOLD" rating with a Mojo score of 58/100 reflects mixed signals—attractive valuation and good quality fundamentals are offset by margin pressures and persistent technical weakness.

The quarter's results reveal a company grappling with margin compression despite healthy top-line momentum. Net sales of ₹6,087.23 crores represented a marginal 0.45% sequential decline but a robust 17.08% year-over-year expansion, indicating sustained demand for cement products. However, the inability to convert this revenue growth into proportionate bottom-line improvement highlights underlying cost pressures and operational inefficiencies that warrant closer examination.

Financial Performance: Margin Contraction Overshadows Revenue Resilience

ACC's Q2 FY26 financial performance presents a tale of two metrics—solid revenue momentum undermined by deteriorating profitability. Net sales of ₹6,087.23 crores showed resilience with a 17.08% year-over-year increase, though the 0.45% sequential decline suggests some seasonal softness or volume pressure. The company's ability to maintain revenue growth in a competitive cement market demonstrates its market positioning, but the real concern lies in what happened below the top line.

Operating profit before depreciation, interest, and tax (excluding other income) stood at ₹778.01 crores in Q2 FY26, translating to an operating margin of 12.78%. This represents an 80 basis points sequential contraction from 13.58% in Q1 FY26 and a 28 basis points decline year-over-year from 13.06%. The margin compression is particularly concerning given that cement companies typically benefit from operating leverage during periods of volume growth. The inability to expand margins despite revenue growth points to rising input costs, pricing pressures, or operational inefficiencies.

The profit after tax margin of 6.17% in Q2 FY26 marked a dramatic 611 basis points sequential decline from 12.28% in the previous quarter. This sharp contraction can be attributed to multiple factors: reduced operating margins, higher tax expenses (33.31% effective tax rate versus 14.87% in Q1 FY26), and significantly lower other income. Other income plummeted to ₹68.35 crores in Q2 FY26 from ₹193.88 crores in the previous quarter, a 64.75% sequential decline that materially impacted overall profitability.

On a half-yearly basis (H1 FY26), ACC reported net sales of ₹12,201.78 crores, up 17.08% year-over-year, with consolidated net profit of ₹1,126.41 crores, representing a 56.69% year-over-year increase. While these numbers appear encouraging, they mask the sequential deterioration witnessed in Q2 FY26. The company's inability to sustain the momentum from Q1 FY26, when it posted ₹751.03 crores in net profit, raises questions about the sustainability of its earnings trajectory.

Operational Challenges: Cost Pressures and Margin Volatility

The cement industry operates in a capital-intensive, commodity-driven environment where margin management is critical. ACC's operating margin volatility over recent quarters—ranging from a high of 18.82% in Dec'24 to a low of 9.46% in Sep'24—indicates the company is struggling to maintain consistent operational efficiency. The Q2 FY26 margin of 12.78% sits below the company's five-year average, suggesting structural challenges rather than temporary headwinds.

Employee costs rose to ₹205.12 crores in Q2 FY26 from ₹175.16 crores in Q1 FY26, a 17.11% sequential increase that outpaced revenue growth. This disproportionate rise in personnel expenses, combined with what appears to be elevated raw material and power costs (implied from the margin compression), has squeezed profitability. The cement sector has faced headwinds from volatile coal prices, freight costs, and competitive pricing dynamics, all of which appear to have impacted ACC's margins.

From a balance sheet perspective, ACC maintains a fortress-like financial position with zero long-term debt and net cash on its books. The company's average net debt to equity ratio of -0.14 indicates it is a net cash company, providing significant financial flexibility. Shareholder funds stood at ₹18,554.84 crores as of March 2025, up from ₹16,329.67 crores a year earlier, reflecting retained earnings accumulation. This strong balance sheet provides a cushion to weather short-term margin pressures and invest in capacity expansion or modernisation initiatives.

Return on equity (ROE) of 12.46% as of the latest quarter, while improved from the average of 11.12%, remains modest for a company in a cyclical industry. Higher ROE indicates better capital efficiency and profitability, and ACC's ROE, though reasonable, lags behind some peers and suggests room for improvement in capital deployment. The return on capital employed (ROCE) of 12.98% similarly indicates adequate but not exceptional returns on the capital invested in the business.

Industry Context: Cement Sector Dynamics and Competitive Positioning

The Indian cement industry is characterised by intense competition, regional demand variations, and significant exposure to infrastructure spending cycles. ACC, as part of the Adani Group's cement portfolio (through majority shareholder Ambuja Cements Limited), operates in a consolidating sector where scale and operational efficiency increasingly determine competitive advantage. The company's 17.08% year-over-year revenue growth in Q2 FY26 outpaced overall industry volume growth, suggesting market share gains or better pricing realisation in specific geographies.

However, the sector has faced headwinds from overcapacity in certain regions, leading to pricing pressures. Cement prices, which had shown firmness in late 2024, appear to have softened in some markets during Q2 FY26, potentially explaining ACC's margin compression despite volume growth. The government's continued focus on infrastructure development—including roads, railways, and affordable housing—provides a supportive demand backdrop, but the benefits are being shared across multiple players in an increasingly competitive landscape.

ACC's operational footprint spans multiple states, with manufacturing facilities strategically located near key demand centres. The company's capacity utilisation levels, while not explicitly disclosed in the quarterly results, appear to be reasonable given the revenue trajectory. However, the margin profile suggests either underutilisation of capacity (leading to higher fixed cost per unit) or elevated variable costs that are compressing profitability. Industry observers note that cement companies with better integrated operations (including captive power and raw material sourcing) have demonstrated more stable margins during cost inflation cycles.

Peer Comparison: Valuation Discount Reflects Concerns

ACC's valuation metrics reveal a significant discount to sector peers, which can be interpreted as either an attractive entry opportunity or a reflection of underlying concerns about the company's growth and margin trajectory. At a price-to-earnings ratio of 15.03x (trailing twelve months), ACC trades at a substantial discount to the industry average P/E of 43x and well below peers such as Shree Cement (60.36x), J K Cements (53.05x), and Grasim Industries (47.25x). Even sister concern Ambuja Cements commands a P/E multiple of 32.72x, more than double ACC's valuation.

The valuation discount is partially justified by ACC's lower ROE of 11.12% compared to J K Cements' 14.28%, though ACC outperforms several peers including Grasim Industries (7.23%), Ambuja Cements (9.11%), and Shree Cement (8.67%) on this metric. Higher ROE indicates better capital efficiency and profitability, and ACC's reasonable ROE suggests the valuation gap may be overdone. The price-to-book value ratio of 1.89x also represents a discount to most peers, with only Shree Cement trading at a lower P/BV of 0.46x (likely due to company-specific factors).

ACC's dividend yield of 0.40% is in line with sector averages, with the company having paid a dividend of ₹7.50 per share with an ex-dividend date of June 13, 2025. The conservative dividend payout ratio of 5.87% suggests management is prioritising capital retention for growth investments or maintaining financial flexibility. Given the company's net cash position and stable cash flows, there may be scope for higher dividend payouts in the future, though this would depend on management's capital allocation priorities.

Shareholding Pattern: Stable Promoter Base with Shifting Institutional Mix

ACC's shareholding structure has remained relatively stable at the promoter level, with Ambuja Cements Limited maintaining a consistent 56.69% stake over the past five quarters through September 2025. This stable promoter holding, with zero pledging of shares, provides governance comfort and strategic continuity. The promoter group, which includes Holderind Investments Ltd (4.48%) and Endeavour Trade and Investment Limited (2.16%), collectively controls the company's strategic direction as part of the Adani Group's cement vertical.

The institutional shareholding pattern reveals interesting dynamics. Mutual fund holdings have declined sharply from 14.29% in March 2025 to 9.49% in September 2025, representing a 4.80 percentage point reduction over two quarters. The most recent quarter saw a 2.58 percentage point decline, suggesting domestic institutional investors have been reducing their exposure to ACC, possibly due to concerns about margin pressures or better opportunities elsewhere in the cement sector.

Conversely, insurance company holdings have shown a steady upward trend, rising from 10.48% in March 2025 to 12.91% in September 2025, with a 1.00 percentage point increase in the most recent quarter. This divergence between mutual fund and insurance company behaviour is noteworthy—insurance companies, with their longer investment horizons, may be viewing ACC's valuation as attractive despite near-term challenges. Foreign institutional investor (FII) holdings increased marginally to 5.05% in September 2025 from 4.66% in June 2025, indicating some international interest at current valuations.

The increase in non-institutional holdings to 15.55% from 14.37% quarter-over-quarter suggests retail investors have been accumulating shares, possibly attracted by the valuation discount and dividend yield. With 173 FIIs and 34 mutual funds holding stakes in ACC, the stock maintains reasonable institutional coverage, though the declining mutual fund interest warrants monitoring as a potential red flag regarding near-term sentiment.

Stock Performance: Persistent Underperformance Across Timeframes

ACC's stock price performance has been disappointing across most timeframes, significantly underperforming both benchmark indices and the broader cement sector. Trading at ₹1,884.85 as of October 31, 2025, the stock is down 18.48% over the past year, compared to the Sensex's 5.92% gain, resulting in a negative alpha of 24.40 percentage points. This underperformance extends across longer periods, with the stock down 0.21% over two years versus the Sensex's 31.65% gain, and down 21.15% over three years against the Sensex's 38.43% advance.

The one-year underperformance versus the cement sector is particularly concerning, with ACC declining 18.48% while the Cement & Cement Products sector gained 6.43%, representing a 24.91 percentage point underperformance. This sector-relative weakness suggests company-specific issues rather than broad industry headwinds are responsible for the stock's poor performance. Investors who held ACC over the past year would have significantly underperformed both the broader market and sector-specific alternatives.

Recent performance has shown some stabilisation, with the stock up 5.39% over three months, outperforming the Sensex's 3.58% gain by 1.81 percentage points. The one-week and one-month returns of 1.89% and 3.04% respectively indicate some near-term momentum, though these gains come after a prolonged period of underperformance. The stock currently trades 20.70% below its 52-week high of ₹2,377.00 and just 6.19% above its 52-week low of ₹1,775.05, suggesting it remains closer to recent lows than highs.

From a technical perspective, ACC exhibits a "Mildly Bearish" trend as of October 1, 2025, having shifted from a "Bearish" trend. The stock trades below all major moving averages—5-day (₹1,861.91), 20-day (₹1,855.70), 50-day (₹1,847.20), 100-day (₹1,865.41), and 200-day (₹1,898.80)—indicating persistent selling pressure. The weekly MACD shows mildly bullish signals, suggesting some near-term technical improvement, but the monthly MACD remains bearish, indicating the longer-term trend remains negative.

The stock's beta of 1.20 (adjusted) classifies it as a high beta stock, meaning it tends to be more volatile than the market. During market upswings, ACC should theoretically outperform, but the persistent underperformance despite its high beta suggests fundamental concerns are overriding the stock's inherent volatility characteristics. The risk-adjusted return of -0.85 over one year, with volatility of 21.82%, places ACC in the "Low Risk Low Return" category, though the negative returns make this classification somewhat misleading—the stock has delivered poor absolute returns despite its volatility.

Investment Thesis: Value Opportunity Clouded by Execution Concerns

ACC presents a complex investment case characterised by attractive valuation metrics offset by operational challenges and technical weakness. The company's Mojo score of 58/100 and "HOLD" rating reflect this tension between value and momentum. On the positive side, ACC trades at a significant discount to peers and its own historical averages, with a P/E ratio of 15.03x well below the industry average of 43x. The company's "Very Attractive" valuation grade and "Good" quality assessment highlight the fundamental value proposition.

The company's balance sheet strength cannot be overstated—with zero long-term debt, a net cash position, and a debt-to-EBITDA ratio described as "Net Debt is too low," ACC has significant financial flexibility. The average EBIT to interest coverage of 23.23x indicates robust debt servicing capacity, though with minimal debt, this metric is less relevant. ROE of 12.46% and ROCE of 12.98% demonstrate adequate capital efficiency, and the company's institutional holdings of 27.75% suggest professional investors see value despite recent challenges.

However, several red flags temper the investment case. The sharp 50.02% quarter-over-quarter decline in net profit, driven by margin compression and lower other income, raises questions about earnings sustainability. The company's inability to maintain operating margins above 13% despite revenue growth suggests cost pressures or competitive dynamics are constraining profitability. The effective tax rate volatility—ranging from 14.87% in Q1 FY26 to 33.31% in Q2 FY26—adds another layer of earnings unpredictability.

Outlook: What Lies Ahead for ACC

The outlook for ACC over the next 6-12 months depends critically on the company's ability to stabilise and expand operating margins while maintaining revenue momentum. The Indian cement sector benefits from strong structural tailwinds—urbanisation, infrastructure development, and housing demand—but these benefits are being competed away in an overcapacity environment. ACC's ability to differentiate through operational excellence, cost management, and strategic pricing will determine whether it can re-rate from its current valuation discount.

Key monitoring points for investors include quarterly margin trends (particularly the sustainability of 12-13% operating margins), volume growth versus pricing realisation, effective tax rate normalisation, and the trajectory of other income. The company's capital allocation decisions—whether it invests in capacity expansion, modernisation, or returns cash to shareholders through higher dividends or buybacks—will also influence the investment case. Given the strong balance sheet, investors should watch for announcements regarding growth investments or shareholder-friendly initiatives.

From a technical standpoint, the stock needs to reclaim and sustain above its 200-day moving average of ₹1,898.80 to signal a trend reversal. Until then, the "Mildly Bearish" technical trend suggests the path of least resistance remains downward, despite the attractive fundamental valuation. Investors should be prepared for continued volatility and potential near-term underperformance until the company demonstrates consistent margin improvement and earnings growth.

The recent increase in insurance company holdings and the stable promoter base provide some comfort that patient, long-term investors see value at current levels. However, the declining mutual fund interest and persistent technical weakness suggest near-term momentum remains challenged. For investors with a 2-3 year horizon willing to tolerate volatility, ACC's valuation discount and strong balance sheet may offer attractive risk-reward, but short-term traders should await clearer technical signals before establishing positions.