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Profitability hit by cost pressures

ACC’s Q3CY22 EBITDA of Rs164mn (down 98% YoY), almost a 20-year low, was drastically below our / consensus estimates. Total cost/te rose by a sharp 7% QoQ and 26% YoY primarily due to higher input prices. At the same time, blended realisations were down ~3% QoQ (up 3% YoY) resulting in blended EBITDA/te declining 98%/96% YoY/QoQ to Rs23/te (I-Sec: Rs458/te). Cement volumes (assuming clinker sales of 0.15mnte) were up 4% YoY (down 8% QoQ) at 7mnte implying market share loss. Factoring-in the higher-than-expected cost inflation, we cut our CY22E-CY23E EBITDA by 6-33%. We also reduce our target price for the stock to Rs2,580/sh (earlier: Rs2,615/sh) based on 11x Sep’24E EV/E on quarterly rollover. Downgrade to ADD (from Buy). Key risks: lower demand/prices and continued cost escalation.

* Revenue grew 7% YoY to Rs39bn (I-Sec: Rs40bn): Grey cement realisation was down 3.3% QoQ to Rs5,163/te owing to QoQ pricing weakness in East and North India. Cement volumes (6.85mnte) were up 4.3% YoY and volumes including clinker (assuming 0.15mnte of clinker sales) were up ~4% YoY (down 8% QoQ) at 7mnte (~78% utilisation). Cement business reported EBIT loss of Rs1.4bn (multi-year low) vs Rs5.5bn YoY and Rs2.6bn QoQ. RMC revenue grew 16% YoY to Rs3.5bn, aided by 10% growth in volumes, while RMC realisations were flat QoQ. RMX EBIT came in at Rs18mn vs Rs109mn YoY and Rs124mn QoQ. Other operating income fell 20% YoY while flat QoQ to ~Rs770mn.

* Blended EBITDA/te (including RMC) plummeted 98% YoY to Rs23/te. Total cost/te increased by a sharp 7% QoQ to Rs5,673/te (+26% YoY). Raw material plus power and fuel cost/te rose 47% YoY owing to a sharp increase in input prices. Freight cost/te was up 10% YoY despite flat diesel prices YoY, which reverses the efficiencies generated through project Parvat in the past few quarters. Other expenses/te rose 7% YoY and 12% QoQ. Recurring PAT was down 116% YoY and PAT loss was at Rs711mn. Meanwhile, ACC has terminated its agreement with Holcim Technology Limited for royalty payment (of technology and know-how-fees) which is charged @ 1 % of eligible net sales from 16th Sep’22. Given the current sales run-rate we believe this decision shall benefit ACC in the range of Rs55-60/te from the coming quarters. ACC reported a one-time expense of ~Rs162mn towards special incentives for certain key employees post the change in ownership.

* Ametha grinding unit delayed by a quarter: The 2.7mnte clinker and 1mnte grinding unit in Ametha may be commissioned by end-Q1CY23 (earlier guidance of Q4CY22). We expect the 2.2mtpa grinding unit at Salai Banwa, Uttar Pradesh, to go on-stream in CY23. ACC has partially commissioned WHRS units at Jamul (10MW) and Kymore (12.4MW) plants in Q3CY22 while the recently approved WHRS units in Wadi and Chanda are on track for commissioning. ACC aims to achieve a WHRS capacity of 75MW in the near term.

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