ACC Ltd : Q2CY21 EBITDA beat to drive narrowing of valuation gap vs. peers; upgrade to Buy - Emkay Global
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Q2CY21 EBITDA beat to drive narrowing of valuation gap vs. peers; upgrade to Buy
* Q2CY21 EBITDA of Rs8.7bn (+66% YoY and flat sequentially) came in 13% above our estimate of Rs7.7bn (consensus: Rs7.3bn), driven primarily by lower opex/ton. Total opex/ton increased 2% YoY/1% QoQ to Rs4,319 vs. our estimate of a 4% QoQ increase, because of favorable coal mix, efficient logistics, and various cost efficiency actions under project ‘Parvat’ across cost levers.
* We increase our CY21E-22E EBITDA by 11-13%, factoring-in better realization and a lower increase in opext/ton. We raise our target EV/EBITDA by 16% to 11.0x (vs. 9.5x previously), based on higher realization CAGR over CY21-25E (+50bps), leading to higher profitability and return ratios. We thus upgrade ACC to a Buy from Hold.
* ACC’s valuation gap vs. peers has widened by around 25% in last 3-4 months, and Q2 beat should help close some of the gap, in our view.
* Our revised Sep’22E TP (roll-over from Jun’22) of Rs2,580 is backed by DCFanalysis (11.25% WACC, 7.0% FCFF growth post FY26), and is 27% higher than Rs2,040 previously. Our TP implies 1-year forward EV/E of 11x vs 10.1x currently.
* Revenues grow 51% YoY to Rs38bn, broadly in line with estimates: Grey cement realization increased 5.7% QoQ (2.1% YoY) to Rs5,153/ton, driven by sharp price hikes in the East and South markets, along with higher sales of premium products. Volumes, including clinker sales, increased 43% YoY (down 13% QoQ) to 7mt, implying a capacity utilization of 77%. Management remains optimistic about cement demand recovery, driven by the government’s increased investments in infrastructure.
* RMC revenues increase 4x YoY (down 29% QoQ) to Rs2.6bn on a similar increase in volumes amid a low base. EBIT margin fell to 1.1% from 7.5% in Q1CY21. Other operating income declined 9% YoY/5% QoQ to Rs745mn.
* Cement EBITDA/ton increased 9% YoY/20% QoQ to Rs1,235/ton, while blended EBITDA/ton (including RMC) grew 16% YoY/QoQ to a 48-quarter high of Rs1,245/ton (our est.: Rs1,134). Cement cost/ton fell 2% YoY/rose 2% QoQ to Rs4,024/ton on favorable coal mix, efficient logistics, and various cost efficiencies achieved through project ‘Parvat’. PAT doubled YoY but remained flat QoQ at Rs5.7bn.
* FCF generation in H1CY21 stood at Rs1.2bn after adjusting for working capital allocation of Rs12bn and capex of Rs3.4bn. ACC paid Rs2.6bn in dividends in H1CY21. Net cash, as of Jun’21, declined marginally by Rs1.5bn to Rs59bn (15% of Mcap). However, it may increase over CY21-23E even after factoring in Rs42bn of capex.
* Project updates: The 2.7mt clinker and 1mt grinding units at Ametha and a 1.6mt grinding unit at Tikaria are expected to be commissioned by Sep’22 (earlier expected in Jun’22). WHRS at Jamul (10MW) and Kymore (14MW) are likely to be commissioned by Jun’22.
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