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Expansion provides growth visibility

Costs to remain under control

* ACC’s 1QCY21 result surprised positively on strong cost control. EBITDA grew 47% YoY on 3% YoY decline in total cost/t driving EBITDA/t to INR1,078.

* ACC’s Central India expansion is expected to get commissioned in 2HCY22, which we estimate would drive an 11% CAGR in volumes over CY20–23E. We expect costs to remain in check, supported by a master supply agreement (MSA) with Ambuja as well as supply chain efficiencies. We raise CY21/CY22 EPS by 10%/5% to factor in strong cost control. Reiterate Buy, with TP of INR2,205.

Lower costs lead to 19% beat on EBITDA

* Rev / EBITDA / Adj PAT rose 23%/47%/59% YoY to INR42.9b/INR8.6b/INR5.6b, beating our estimate by 3%/19%/27% (led by lower power and fuel cost).

* While volumes were up 22% YoY to 7.97mt (est 7.73mt) on account of a lower base, blended EBITDA/t was up 19% QoQ (+21% YoY) to INR1,078 (15% above est), led by lower-than-expected costs.

* Cement realization declined 1% QoQ (+4% YoY) to INR4,835/t (in-line), while blended realization (including RMC) was flat QoQ (+1% YoY) at INR5,385/t.

* Blended cost per ton declined 3% YoY to INR4,307/t (-4% QoQ) and was below our est. of INR4,460/t, led by better fixed cost absorption and 10% YoY decline in power and fuel cost (to INR1,009/t).

Highlights from management commentary

* ACC operated at 90% utilization in 1QCY21 (72% utilization in CY20).

* RMC sales volumes stood at 0.83m cu.m (-11% YoY).

* Raw material cost was up due to higher cost of slag and fly ash, partially mitigated by cost savings from Project Parvat.

* To mitigate the impact of rising diesel costs, ACC continued to focus on direct dispatches, network optimization, and procurement savings.

* Capacity expansion: Commercial production at the 1.4mt grinding capacity in Sindri had commenced in Jan’21, and the greenfield project in Ametha (with associated grinding units) is guided to get commissioned by 2QCY22 – however, we expect this to happen by 4QCY22.

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) cost is expected to stay in check, aided by savings in logistic costs, and (c) with planned expansions, the proportion of inefficient assets would decline, improving profitability.

* We value ACC at 10x Mar’23 EV/EBITDA (~20% discount to the past five-year average of 12.5x) to arrive at Target Price of INR2,205; this implies target EV/t of ~USD105 and target P/E of 20x on CY22E. Maintain Buy.

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