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Published on 12/08/2020 9:16:09 AM | Source: Motilal Oswal Financial Services Ltd

Buy Acc Ltd For Target Rs.1,570 - Motilal Oswal

Posted in Broking Firm Views - Long Term Report| #ACC Ltd #Cement Sector #Broking Firm Views Report #Motilal Oswal #Quarterly Result

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Fighting back with aggressive cost reduction

EBITDA, PAT to turn positive YoY from current quarter

* ACC’s positive 2QCY20 result was a welcome surprise, attributed to sharp cost reduction on account of significant curtailment in discretionary costs. Volumes declined 27% QoQ due to COVID-19-led lockdown and EBITDA just 10% QoQ.

* We raise our CY20 EBITDA and PAT estimates by 12% and 15%, respectively, as we factor lower discretionary costs for the year. We expect EBITDA and PAT to turn positive YoY from the current quarter. We have, however, kept our CY21 estimates largely unchanged as discretionary costs should normalize next year. Maintain Buy.

 

Lower costs, higher realization partly offset volume decline

* Cement volumes declined 34% YoY to 4.8mt on government-mandated shutdown witnessed up to Apr’20. This led to 37% YoY decline in revenue to INR26.0b.

* Cement realization rose 11% QoQ (+1% YoY) to INR5,164/t on account of price hikes taken post lockdown. However, blended realization (including RMC) was up only 2% QoQ (-5% YoY) to INR5,464/t (in line with estimate). This was due to a sharp 83% YoY decline seen in RMC revenue.

* Despite negative operating leverage from lower volumes, blended cost declined to INR4,362/t (-7% YoY; -2% QoQ) (est.: 4,722/t), led by lower raw material, power, and fuel costs and substantial cuts in discretionary fixed costs (ad spends, travel, repairs and maintenance, third-party services, and so on).

* Blended EBITDA/t improved 23% QoQ (+1% YoY) to INR1,102, substantially higher than our estimate of INR737/t, attributed to lower cost.

* EBITDA at INR5.2b (-33% YoY; -10% QoQ) was thus 48% above our INR estimate; the margin expanded 3.43pp QoQ to 20.2% (+1.33pp YoY).

* PAT at INR2.7b (-41% YoY; -16% QoQ) was also 65% above our estimate.

* Cash increased by INR1.8b in 1HCY20 to INR47.2b (19% of market cap).

* In 1HCY20, OCF stood at INR5.6b (v/s INR4.1b in 1HCY19) as working capital increased by a lower amount of INR3.9b (v/s INR7.2b in 1HCY19).  Capex was only INR1.74b in 1HCY20 v/s INR2.0b in 1HCY19 as the planned expansion in the central region of India has been put on hold.

 

Highlights from management commentary

* CY20 would mark the steepest fall in demand for India’s Cement industry.

* The investment cycle would slow considerably due to demand contraction.

* While commercial real estate demand would be weak, government support through direct cash transfers and NREGA should aid rural housing.

 

Valuation and view

* ACC trades at a 35–60% valuation discount to peers Shree, UltraTech, and Ramco. We believe such a large discount is excessive as: (a) ACC has arrested its market share losses since CY17, (b) its net cash balance sheet (19% of market cap) renders it well-placed to withstand any extended disruption from COVID19, and (c) with planned capacity expansions in CY22, the proportion of inefficient assets would decline, improving profitability.

* We value ACC at 9x CY21E EV/EBITDA (~30% discount to the past five-year average of 12.7x) to arrive at Target Price of INR1,570; this implies target EV/t of USD90 and target P/E of 21x on CY21. Maintain Buy.

 

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