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(Aggressive growth + margin levers) to narrow down valuation gap

About the stock: ACC (now Adani group conglomerate part) is a large cement player with capacity of over 34.5 MT in India and one of the oldest cement players in industry. ACC also manufactures ready-mix concrete and has 50 plants across India.

* ACC has a strong balance-sheet with debt free status

* Ongoing capex of | 3500 crore would increase its capacity to 39.3 MT by CY22E. Grinding unit (GU) in Sindri & Tikaria has already been commissioned, balance 3.2 MT new capacity is progressing as per schedule

Key Highlights:

* The recently concluded deal (worth $6.5 billion) between Holcim & Adani has now made Adani Group the second largest cement player in the industry with a combined total cement capacity of 67.5 MT (ACC + Ambuja). Post the deal, Adani now holds 63.15% stake in Ambuja and 56.69% stake in ACC (of which 50.05% is held through Ambuja Cement)

* The Board of both these companies has also been reconstituted. Gautam Adani will be the Chairman and Non-Executive, Non-Independent Director of Ambuja Cement (promoter entity of ACC) while Karan Adani will be the Chairman and Non-Executive, Non-Independent Director of ACC

* The new promoter intends to double the group’s cement capacity in next five years and become largest and most efficient cement company by 2030

* Keeping this in mind, the new board of Ambuja (parent of ACC) has approved fund infusion of | 20,000 crore by issuing warrants to the promoter entity on a preferential basis at a price of | 419. Post conversion of these warrants, promoter’s shareholding in Ambuja will increase to 70.3% vs. 63.2% at present while effective holding in ACC will rise to 41.8%

* Also, the group’s exposure to energy and logistics will help it to improve cost dynamics and gain supply chain efficiencies

What should investors do: Given the healthy outlook, new aggressive management & comfortable valuations post correction, we retain our BUY rating.

Target Price and Valuation: We value ACC at | 2,900 i.e.11.5x CY23E EV/EBITDA.

Key triggers for future price performance:

* While the group is envisaging doubling the current capacity over the next five years, the ongoing expansion (| 3,500 crore capex) would increase ACC’s capacity to 39.3 MT by CY23 from current 34.5 MT capacity

* Cost efficiency measures like higher renewable power share, strong logistics support of promoter group to drive margin expansion in long run

* Immediate cost benefits would come from royalty cost savings, raw material sourcing like fly ash, coal on better terms

Alternate Stock Idea: Apart from ACC, we also like UltraTech Cement.

* It is a market leader with strong brand in the retail segment

* BUY with a target price of | 7,600/share

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