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* Expansion to address volume growth concern
ACC recently announced its plan to add 3mnte clinker unit at Madhya Pradesh and four grinding units totalling 5.9mnte capacity in Central and East regions. This would entail capex of Rs30bn with capacities expected to be operational by CY21E. We believe this expansion would address key investor concern on volume growth as well as strengthen ACC’s market share in high growth Central and East regions (which enjoy high utilisation/better margins). With increasing share of newer efficient capacities and various cost efficiencies [increasing share of waste heat recovery systems (WHRs) and increasing usage of alternative fuel & raw materials (AFR)], ACC’s overall cost structure is expected to improve, thereby reducing cost/te gap with larger peers. Accordingly, we expect ACC’s valuation discount vs peers to narrow with improving EBITDA/te and return ratios. Maintain BUY with target price unchanged at Rs1,750/share based on 11x Sep’20 EV/E. Valuation at ~9x CY20E EV/E remains attractive. ACC remains one of our preferred picks.
Volume growth concern likely to be addressed:
ACC plans to set up a greenfield integrated cement plant at Ametha, Madhya Pradesh with 3mnte clinker and 1mnte cement capacity alongwith two grinding units of 3.8mnte in Uttar Pradesh (1.6mnte grinding unit in Tikaria and another 2.2mnte grinding unit). Additionally, it also plans to add 1.1mnte grinding unit in Sindri, Jharkhand which is likely to be supported by excess clinker at Jamul and may come up over next two years. The said expansion would increase its clinker and cement capacity by 18% and 13% to 25.6mnte and 39.3mnte respectively by CY21E and likely address key investor concern on ACC’s volume growth. Total capex is expected to be Rs30bn (~US$80/te) and would be funded through internal accruals.
* Strengthening market share in high growth Central and East regions:
ACC’s expansion plans reflect management’s expectation of strong demand CAGR of >6% continuing over next few years, and that the company is already operating at high utilisation level (~85% in CY18E). ACC expects to maintain its market share in the interim despite operating at high utilisation. Central and East regions would constitute 48% of ACC’s capacity share from the current 38% post expansion. Accordingly, we believe this expansion would strengthen ACC’s market share in high growth Central and East regions (which enjoy high utilisation/better margins).
* New capacities to improve cost efficiencies; EBITDA/te gap with peers to narrow:
ACC is focused on improving its cost structure with the increase in share of newer capacities through energy efficiencies, higher usage of petcoke (up to 75%), linkage coal (up to 30%), AFR (up to 4%), installing WHRS in several plants coupled with operating leverage. Besides, ACC has entered a master supply arrangement (MSA) with ACEM, which is expected to provide synergies of 3-5% of CY17 PBT (~Rs1bn-Rs1.5bn p.a.) to be shared equally between the two companies.
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