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Expansion provides growth visibility

Cost control to drive earnings growth

* ACC’s 2QCY21 result surprised positively on strong cost control. Moreover, coupled with a better pricing environment, this led to EBITDA/t of INR1,279 – the highest since CY10 – despite higher energy costs.

* ACC’s Central India expansion should be commissioned in 2HCY22, potentially driving a 9% volume CAGR over CY21–23E. We expect costs to remain in check, supported by a master supply agreement (MSA) with Ambuja as well as supply chain efficiencies. We raise our CY21/CY22 EPS estimate by 10%/8%, factoring in a better realization outlook. Reiterate Buy, with TP of INR2,480.

Higher volume and better realization drive 21% beat on EBITDA

* Revenue / EBITDA / Adj PAT rose 49%/67%/93% YoY to INR38.8b/INR8.7b/INR5.7b and beat our estimate by 5%/21%/26% (led by higher volumes, better realization, and cost control).

* Volumes rose 44% YoY to 6.84mt (5% above est) on account of a low base. Blended EBITDA/t rose 19% QoQ (+16% YoY) to INR1,279/t (16% above est).

* While cement realization improved 5.7% QoQ (+2.1% YoY) to INR5,153/t (inline), blended realization (including RMC and clinker sales) was up 5.5% QoQ (+3.9% YoY) to INR5,680/t.

* ACC used the weak demand in Jun-Q to build clinker inventory, which should support volume growth in 2HCY21 despite capacity limitations.

* Blended cost per ton was lower than expected at INR4,401/t (+2% QoQ; +1% YoY) on account of higher clinker production (with closing inventory being netted out from cost). This led to better-than-expected fixed cost absorption.

* ACC also booked exceptional loss of INR381m on account of the impairment of investment value in Lucky Minmat Ltd (a wholly-owned subsidiary).

* 1HCY21 revenue / EBITDA / adj PAT rose 34%/56%/75% YoY to INR81.8b/INR17.3b/INR11.3b, led by a 31% increase in volumes to 14.81mt and 3.01pp improvement in EBITDA margins to 21.2%.

* 1HCY21 OCF/capex/FCF stood at INR4.2b/INR3.4b/INR0.8b v/s INR5.6b/INR1.7b/INR3.9b in 1HCY20. OCF and FCF were impacted by clinker inventory buildup, which should support 2HCY21 sales.

Highlights from management commentary

* ACC operated at 77% utilization in 2QCY21 (90% utilization in 1QCY21).

* Raw material cost was higher due to lower clinker factor (58% in 1HCY21), 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: Construction work has commenced at the greenfield project in Ametha (with associated grinding units). The waste heat recovery system (WHRS) in Jamul (10MW) and Kymore (14MW) is expected to be commissioned by 2QCY22.

* Demand outlook: The management expects strong demand recovery. This would be led by the government’s focus on large-scale infra projects and affordable housing, coupled with a revival in industrial capex, driven by the implementation of the Production-Linked Incentive scheme.

* RMC sales volumes stood at 0.58m cu.m (v/s 0.15m cu.m in 2QCY20). Volumes were up 31% YoY to 1.41m cu.m for 1HCY21.

Valuation and view

* ACC trades at a 30–40% 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 June’23 EV/EBITDA (~10% discount to the past five-year average of 11x) to arrive at Target Price of INR2,480; this implies target EV/t of ~USD116 and target P/E of 20x on CY22E. Maintain Buy.

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