ACC Q3 FY26: Stellar Profit Surge Masks Underlying Margin Pressures

The impressive headline numbers belie a more nuanced reality. Whilst revenue growth of 27.99% year-on-year demonstrates robust demand recovery in the cement sector, the company's operating performance reveals margin pressures and sequential deterioration. The quarter witnessed a negative tax rate of -46.66%, contributing ₹356.09 crores to the bottom line—an exceptional item that artificially inflated profits. Excluding this tax benefit, the underlying operational performance appears considerably weaker, raising questions about the quality of earnings.

Financial Performance: Revenue Growth Amid Margin Volatility

ACC's Q3 FY26 revenue performance showcases the cement sector's recovery trajectory. Net sales reached ₹5,931.67 crores, marking a 27.99% year-on-year increase from ₹4,634.46 crores in Q3 FY25. However, the sequential trend reveals softness, with revenue declining 2.56% from Q2 FY26's ₹6,087.23 crores. This quarter-on-quarter contraction reflects typical seasonal patterns in cement demand, though the magnitude warrants attention given the company's scale.

Operating profit before depreciation, interest, and tax (excluding other income) stood at ₹845.69 crores in Q3 FY26, translating to an operating margin of 14.26%—a substantial improvement from 9.42% in Q3 FY25 but still below the 18.82% achieved in Q4 FY25. The margin expansion year-on-year reflects improved pricing power and better cost absorption as volumes recovered. However, the sequential compression from Q4 FY25's peak margins suggests pricing pressures or rising input costs are beginning to bite.

The company's gross profit margin for Q3 FY26 reached 17.54%, up from 11.36% in the year-ago quarter, indicating better realisation per tonne. Yet, the PAT margin of 18.87%—whilst impressive on paper—is heavily influenced by the negative tax rate. Normalising for this exceptional tax benefit would reveal a PAT margin closer to 10-11%, more aligned with historical trends and peer performance.

Operational Challenges: Margin Sustainability Under Question

Beneath the headline profit growth lies a concerning operational narrative. ACC's return on equity (ROE) stands at 16.17% for the latest period, representing strong capital efficiency and placing the company well above the sector average. This high ROE reflects the company's ability to generate attractive returns from shareholder capital, a key strength in the capital-intensive cement industry. The average ROE of 11.72% over recent years demonstrates consistent profitability, though the recent uptick to 16.17% suggests improving operational leverage.

Return on capital employed (ROCE) reached 17.88% on a half-yearly basis for H1 FY26, marking the highest level in recent periods. This metric, which measures how efficiently the company deploys its capital, has improved from an average of 17.89% to the current elevated level. The strong ROCE indicates management's effectiveness in generating returns from the capital base, a particularly impressive feat given the industry's cyclical nature and high fixed-cost structure.

However, the balance sheet reveals a mixed picture. ACC maintains a virtually debt-free status with negligible long-term debt and a net debt-to-equity ratio of just 0.01. This conservative capital structure provides significant financial flexibility and reduces vulnerability to interest rate fluctuations. The company's interest coverage ratio averages a robust 22.11 times, indicating ample earnings cushion to service debt obligations. Current assets of ₹9,144.31 crores as of March 2025 comfortably exceed current liabilities of ₹5,668.15 crores, ensuring adequate liquidity.

Industry Context: Cement Sector Recovery Gaining Momentum

The Indian cement sector is experiencing a demand revival driven by infrastructure spending and housing activity. ACC's 27.99% year-on-year revenue growth in Q3 FY26 outpaces the broader sector, suggesting market share gains or better regional exposure. The company's 5-year sales compound annual growth rate (CAGR) of 11.92% demonstrates consistent expansion, though EBIT growth of 8.35% over the same period indicates margin pressures have persisted.

Capacity utilisation across the industry has improved, supporting pricing discipline. However, the competitive landscape remains intense, with major players including UltraTech, Ambuja Cements, and Shree Cement vying for market share. ACC's positioning as part of the Adani Group (through Ambuja Cements' majority stake) provides strategic advantages in terms of raw material sourcing and distribution synergies, though integration benefits are still materialising.

The government's infrastructure push, including the National Infrastructure Pipeline and affordable housing schemes, bodes well for long-term cement demand. However, near-term headwinds include monsoon disruptions, regional oversupply in certain markets, and input cost volatility. ACC's geographical diversification across India provides some insulation from regional demand fluctuations, but the company is not immune to broader sector trends.

Peer Comparison: Valuation Discount Reflects Concerns

ACC's valuation metrics reveal a significant discount to peers, reflecting market scepticism about the company's growth trajectory and margin sustainability. At a price-to-earnings (P/E) ratio of 9.88 times trailing twelve-month earnings, ACC trades at a steep discount to the cement sector average P/E of approximately 27 times. This valuation gap suggests investors are pricing in execution risks or structural challenges.

The price-to-book value (P/BV) ratio of 1.60 times also trails peers like Shree Cement (4.39x) and J K Cements (6.57x), though it exceeds Grasim Industries (1.95x). Given ACC's ROE of 11.72%—higher than most peers except J K Cements—the valuation discount appears unjustified on a pure return-on-equity basis. However, the market seems to be discounting concerns about margin sustainability and growth visibility.

ACC's dividend yield of 0.44% is modest, with the company paying ₹7.50 per share as the latest dividend. The low payout ratio of 5.87% suggests significant retained earnings, though this also indicates management's cautious approach to capital allocation. The company's debt-free status matches Ambuja Cements, providing financial flexibility that premium-valued peers like J K Cements lack.

Valuation Analysis: Attractive Entry Point or Value Trap?

ACC's current valuation metrics paint a picture of a stock trading at significant discounts to both historical levels and peer multiples. At ₹1,685.50, the stock trades 20.62% below its 52-week high of ₹2,123.30, offering potential upside for contrarian investors. The enterprise value-to-EBITDA multiple of 8.97 times appears reasonable for a mature cement player, particularly one with negligible debt.

The company's PEG ratio of 0.13 suggests the stock is dramatically undervalued relative to its growth prospects, with the ratio well below the threshold of 1.0 that typically indicates fair value. However, this metric should be viewed cautiously given the recent profit surge stemming from exceptional tax credits rather than sustainable operational improvements. Normalising for the tax anomaly would likely push the PEG ratio higher, though it would still indicate relative undervaluation.

Historical context reveals ACC has traded at premium valuations during periods of strong cement demand and margin expansion. The current discount to the sector average P/E of 27 times reflects market concerns about the company's ability to sustain margins in a competitive environment. The stock's technical trend has turned bearish since December 8, 2025, with the price falling below key moving averages, adding to investor caution.

Shareholding Pattern: Institutional Activity Signals Caution

The shareholding structure of ACC reveals interesting trends in institutional investor sentiment. Promoter holding has remained stable at 56.69% over the past five quarters, reflecting the Adani Group's commitment through Ambuja Cements. This stable promoter base provides governance continuity, though it also limits free float available for trading.

The most notable trend is the steady decline in mutual fund holdings, which have dropped from 14.29% in March 2025 to 7.84% in December 2025—a reduction of 6.45 percentage points over three quarters. This sustained selling by domestic institutional investors suggests concerns about near-term performance or reallocation to more attractive opportunities within the sector. The sequential decline of 1.65% from September to December 2025 indicates the exodus continues.

Conversely, insurance companies have been accumulating shares, increasing their stake from 10.48% in March 2025 to 13.39% in December 2025. This 2.91 percentage point increase suggests long-term institutional investors see value at current levels, though their buying has been insufficient to offset mutual fund selling. Foreign institutional investors (FIIs) have modestly increased their holdings to 5.99%, up 0.94% quarter-on-quarter, indicating some international interest.

The divergence between mutual fund selling and insurance company buying reflects differing investment horizons and risk appetites. Mutual funds, with shorter performance measurement periods, appear concerned about near-term margin pressures and competitive dynamics. Insurance companies, with longer investment horizons, may be positioning for eventual mean reversion and sector recovery.

Stock Performance: Persistent Underperformance Weighs on Sentiment

ACC's stock performance has been disappointing across most timeframes, significantly underperforming both the benchmark Sensex and the broader cement sector. Over the past year, the stock has declined 15.76% whilst the Sensex gained 8.49%, resulting in negative alpha of 24.25 percentage points. This underperformance extends across longer periods, with the stock down 31.98% over two years against the Sensex's 16.47% gain.

The technical picture reinforces the bearish sentiment. ACC's stock price of ₹1,685.50 trades below all key moving averages—the 5-day (₹1,700.37), 20-day (₹1,725.76), 50-day (₹1,777.26), 100-day (₹1,814.54), and 200-day (₹1,856.21) moving averages. This alignment of moving averages in descending order typically signals a strong downtrend, with each average acting as resistance to any recovery attempt.

The stock's beta of 1.20 indicates higher volatility than the broader market, amplifying both gains and losses. With a volatility of 18.56% over the past year, ACC has experienced significant price swings, contributing to its classification as a "high beta" stock. The negative risk-adjusted return of -0.85 over one year reflects poor returns relative to the risk taken, making the stock unattractive from a risk-return perspective.

Comparing ACC's 1-year return of -15.76% to the cement sector's gain of 9.41% reveals underperformance of 25.17 percentage points versus peers. This substantial gap suggests company-specific issues beyond broader sector trends are weighing on the stock. Investors have clearly lost confidence in ACC's ability to match peer performance, reflected in the sustained selling pressure.

Investment Thesis: Quality Company at Distressed Valuation

The investment case for ACC presents a classic value investing dilemma—a fundamentally sound company trading at distressed valuations due to near-term challenges. The company's quality grade of "GOOD" reflects its strong balance sheet, negligible debt, and consistent operational track record. With an average ROCE of 17.89% and current ROE of 16.17%, ACC demonstrates the ability to generate attractive returns on capital, a critical attribute in the capital-intensive cement industry.

However, the near-term drivers paint a more troubling picture. The financial trend has turned negative, with quarterly PAT falling 53.4% versus the previous four-quarter average. Key operational metrics such as operating profit margin and profit before tax (excluding other income) have also deteriorated to multi-quarter lows. The technical trend remains bearish, with the stock in a confirmed downtrend since December 2025.

Outlook: What Lies Ahead for ACC

The outlook for ACC hinges on management's ability to address operational challenges whilst capitalising on sector tailwinds. The cement industry's demand fundamentals remain supportive, with infrastructure spending and housing activity providing volume growth opportunities. However, competitive intensity and input cost pressures threaten margin sustainability, requiring operational excellence and pricing discipline.

Investors should monitor quarterly margin trends closely, particularly the ability to maintain operating margins above 13-14%. Any sustained compression below these levels would signal structural challenges requiring management intervention. The company's pricing power in key markets and ability to pass through cost increases will be critical determinants of profitability.

The shareholding pattern deserves continued attention. If mutual fund selling persists or accelerates, it could pressure the stock further despite attractive valuations. Conversely, stabilisation or reversal of this trend would provide an important bullish signal. The technical picture also warrants monitoring—a decisive move above the 200-day moving average at ₹1,856.21 would indicate trend reversal potential.