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Robust pricing bolsters margins
We reiterate BUY on ACC with TP of Rs 1,930 (11x its Jun21E consolidated EBITDA and 0.5x its CY20E CWIP).
HIGHLIGHTS OF THE QUARTER
* During 2QCY19, consolidated net sales/EBITDA/adj PAT rose 8/17/22% YoY to Rs 41.50/7.83/4.56bn resp.
* Robust price increase: ACC’s volume growth stood flat YoY, impacted by both demand slowdown during the elections and by sharp cement price increase seen during the quarter (across all markets). Thus, utilization remained flat at 91% YoY. However, cement NSR jumped 7/11% YoY/QoQ on strong price recovery in all markets. We believe ACC’s rising share of valued added solutions (in the product mix) is also leading to higher reported NSR.
* Cement margin at multi-year high level: Buoyed by strong realization gains, 2Q unitary EBITDA increased 20/62% YoY/QoQ to Rs 1,052/MT (highest since Jun 2012)! Its opex marginally increased 3% QoQ (+5% YoY) driven by 7% increase in unitary fixed costs (less volumes QoQ).
* RMC segment (7% of total revenue): Sales volume rose 11% YoY in 2Q, however higher cement prices pulled down segmental EBITDA by 35% YoY to Rs212mn (3% of total EBITDA vs 5% YoY).
* 1HCY19 performance: Robust pricing in 2Q alongwith benign opex in 1HCY19 boosted ACC’s 1HCY19 EBITDA/adj PAT by 13% each to Rs 13.15/7.03bn resp. Strong op profits, and lower tax outflow boosted reported OCF to Rs 4.13bn in 1HCY19 vs (Rs 1.25bn) YoY. Capex spend increased to Rs 2.03bn vs Rs 1.34bn in the same period. Capex is rising as ACC is working on 6mn MT capacity increase (in central and east regions) by early CY22E.
* Strong near term outlook: While ACC’s volume growth will taper off to sub 5% (absence of surplus capacity), its profitability should expand in CY19/20 led by healthy cement price recovery (despite factoring in QoQ fall in prices in 2H), and moderating fuel costs.
We estimate ACC to deliver 13/17% EBITDA/PAT CAGR during CY18-20E. Given ACC’s healthy cash flow and RoE, and its firming up major expansion plans (20% capacity increase by end CY21E/early CY21E), current valuation (of 9.3x/8.8x its CY20/21E EBITDA, EV/T of USD 120) is inexpensive. We reiterate BUY with a TP of Rs1,930 (ascribing 11x to its Jun-21E EBITDA and 0.5x to its CY20E CWIP). Key risks: Sharp roll back in cement prices, rebound in energy costs (crude led).
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HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475
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