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Margins erode sharply; worst now behind

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

* ACC has a strong balance-sheet with debt free status. However, it remains a laggard in terms of efficiency vs. peer companies as of now

* The ongoing capex of | 3500 crore to increase its capacity to 39.3 MT. GU in Sindri & Tikaria has already been commissioned. Balance 3.2 MT new capacities are progressing and will be commissioned by March 2023

Q3CY22 Results: ACC reported weak results for Q3CY22, impacted by a high cost environment.

* Net revenues were up 6.4%YoY to | 3,987.3crore. It was lower than our estimated revenue of | 4012.5 crore

* Absolute EBITDA declined 98% YoY, 96% QoQ to | 16.4 crore. It was far lower than I-direct estimated EBITDA of | 280.7 crore. EBITDA margin came in at mere 0.4% (vs. I-direct estimate: 7%)

* With negligible EBITDA, exceptional loss of | 16.25 crore, net loss was at | 87.3 crore vs. net profit of | 450 crore last year and | 227 crore last quarter

What should investors do? While we believe that the structural change in the ownership as well as aggressive expansion strategy through organic/inorganic route could pave the way for growth as well as margin expansion led by cost synergies and operating leverage opportunities, we await more clarity and would want to see how this plays out.

Target Price and Valuation: Given its comfortable valuations, we retain BUY rating on the stock with revised target price of | 2,700 i.e.11.5x CY23E EV/EBITDA.

Key triggers for future price performance:

* While new promoter (Adani) is envisaging doubling of the group’s 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 34.5 MT

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

* Immediate cost benefits to come from royalty cost savings (~1% of revenue), raw material sourcing like flyash, coal on better terms

Alternate Stock Idea: Apart from ACC, in our cement sector coverage we also like UltraTech Cement.

* It is a market leader with strong brand in the retail segment. It has a robust balance sheet and aims to become debt free by FY23E

* BUY with a target price of | 7600/share

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