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Cost efficiencies and capacity expansion to scale up profits

Sustainability and innovation are the key focus areas; demand outlook optimistic

ACC is a leading pan-India cement player with installed cement capacity of 36.1mtpa (including 1.6mtpa recently commissioned in central India). In this note, we analyze the CY21 Annual Report (AR) of ACC. Key highlights of our analysis are as follows: a) ACC had accelerated its growth plans (undertook expansions and completed them on time) to leverage the rising cement demand; b) it has been a pioneer in sustainability and innovation (has scaled up green products and solutions); and c) it has improved profitability through cost reduction measures (delivering superior performance).

The management estimates 7% demand growth in CY22 propelled by: a) improvement in demand from government infrastructure activities, b) affordable housing projects and c) improvement in demand from commercial real estate and office spaces. The management estimated industry volume growth at 11-13% YoY in CY21.

Capacity expansions on track, focus remains on timely completion

ACC commissioned: a) 1.4mtpa grinding unit (GU) at Sindri, Jharkhand in CY21 within a record time of nine months and b) 1.6mtpa GU at Tikaria, Uttar Pradesh in Feb’22 within 12 months of project commencement.

The Greenfield projects at Ametha, Madhya Pradesh (2.7mtpa clinker and 1mtpa cement) are likely to get commissioned by 2QCY22 and another GU of 2.2mtpa at Salai Banwa, Uttar Pradesh is expected to get commissioned in CY23 (land acquisition is at an advanced stage).

ACC is identifying debottlenecking opportunities in all its existing plants for future growth. The management highlighted post-4QCY21 conference call that they want to expand capacities to 45-50mtpa in the next 2-3 years.

Higher volumes, better realization and cost savings drive profits higher

In CY21, ACC reported 21% YoY EBITDA growth to INR30b attributable to strong volume growth of 13% YoY (marginally below industry growth) to 28.9mt and 3.5% YoY improvement in blended realization.

Sales volumes of premium products rose 20% YoY, and their contribution in sales volumes has gone up to 27%+ in CY21 from 25% in CY20.

Despite significant increase in key input costs (fuel prices, slag and fly ash costs, diesel and packing bag prices), total operating costs rose only 3% YoY to INR4,552/t (on a blended basis).

Key cost-saving initiatives included: a) reduction in clinker factor by 1.4pp YoY; b) lower usage of petcoke and reduction in electricity consumption; c) reduction in lead distance (down 4% YoY) and d) improvement in sales volumes through Master Supply Agreement (MSA) with Ambuja Cements.

In CY21, EBITDA/t was up 7% YoY to INR1,039 (highest after CY09). EBITDA margin also improved 60bp YoY to 19%.

MSA arrangements accelerating; proposes higher threshold of INR35b

ACC and Ambuja entered into MSA arrangements in CY18 with the following objectives: a) to unlock synergies in the form of better pricing power in common markets, b) to maximize capacity utilization, c) to optimize efficiency and d) to reduce costs. The terms of MSA were renewed for a period of three years in CY21.

ACC sold 0.86mt of cement/clinker to Ambuja in CY21. Goods purchased from Ambuja grew 1.8x YoY (to INR8.9b from INR5.1b in CY20) and goods sold to Ambuja rose 2.2x YoY (to INR4.8b from INR2.2b in CY20) under the MSA arrangements

ACC will approach the shareholders at the ensuing AGM for higher threshold limit of up to INR35b of aggregate value for all such Related Part Transactions (RPTs) with Ambuja Cements for CY22 (notably higher v/s the previous threshold of INR10b).

Maintains negative cash conversion; net cash to improve in CY23E

ACC maintained its negative cash conversion cycle (-3 days in CY21 v/s -2 days in CY20). This was led by an increase in trade payable days in CY21

ACC has been generating strong cash flows since CY19 and the cumulative operating cash flow (OCF) stood at INR73b during CY19-21 (v/s INR41b over CY16-18). Free cash flow (FCF) stood at INR49b during CY19-21 (v/s INR25b during CY16-18).

ACC has continued to remain a net cash positive company from CY06 and it has a net cash position of INR74b in CY21 v/s INR59b in CY20. We expect its net cash to be at INR63b/INR80b in CY22E/CY23E, respectively, despite: a) higher capex and b) higher dividend payment announced in CY21.

The company has recommended a dividend of INR58/share (payout of 60%) v/s INR14/share (payout of 19%) in CY20

Stock price correction provides a better entry point; maintain BUY

ACC trades at 12.8x/9.5x CY22E/CY23E EV/EBITDA and USD124/118 CY22E/CY23E EV/ton, respectively. The stock has traded at an average EV/EBITDA of 11.9x over the last 10 years

The stock price has corrected 11.8% between Aug’21 and Mar’22 and underperformed broader indices by 12.4% in this period, primarily due to margin contraction led by a steep increase in coal and petcoke prices.

Coal and petcoke prices remained volatile (current South African coal price is at USD260/t v/s peak of USD460/t in Mar’22 and average consumption price is at USD155-160/t for most of the companies in 3QFY22). The prices, however, are likely to cool down. The companies are also trying to take price hikes that will ease concerns of a steep margin contraction going forward.

We maintain our BUY rating on ACC with a TP of INR2,470 (premised on 11x CY23E EV/EBITDA), implying an upside of 15% from the current level.

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