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AR analysis - focusing on profitable growth

Key takeaways from ACC’s CY20 annual report analysis include: a) Management remains optimistic on CY21 demand growth and expects industry to post >10% YoY growth; b) cost efficiency programme ‘Parvat’ yielded savings of Rs110/te in CY20 – confident of achieving targeted Rs200/te ; c) 2.6mnte Ametha expansion may commission by Jun’22; d) company achieved increased synergies of ~5% of CY20 PBT via MSA with ACEM; and e) EBITDA-to-OCF conversion stood strong at ~100%; net cash increased by Rs12.5bn to Rs59bn. ACC posted 15% EBITDA CAGR over CY17-20 and likely to post similar CAGR over CY20-22E (lower volume growth may be offset by better cost efficiencies). Hence, valuation at <8xCY22E EV/E or US$100/te is attractive, given ACC’s improving profitability / return ratios and industry tailwinds over next few years. Maintain BUY with unchanged target price of Rs2,050/share (9xFY23E EV/E). Key risks: Lower demand/pricing.

* Management remains optimistic on CY21 demand growth led by increased government thrust on infrastructure and strong rural housing demand and expects industry to post >10% YoY growth. ACC’s 1.4mnte Sindri grinding unit got commissioned in Jan’21. 2.7mnte clinker unit at Ametha, MP along with 1mnte grinding unit and 1.6mnte grinding unit at Tikaria is likely to commission by Jun’22, and balance 2.2mnte Shonebhadra, UP grinding unit may commission by early’24. Besides, commissioning of 4.5mnte Marwa Mundra expansion of ACEM in CY21 may also provide incremental volumes to ACC. Overall, ACC targets to maintain its market share. Given high utilisation vs peers, ACC intends to focus on high contribution markets and increase share of value-added / premium products.

* Achieved cost savings of Rs110/te or >Rs2.5bn in CY20 via ‘Parvat’. Clinker factor was further reduced by 1.37% and the share of blended cement increased by 100bps YoY to 90%. ‘Parvat’ also led to higher direct despatches, warehousing cost rationalisation, source mix optimisation, renegotiating various contracts etc. Covid’19 induced cost optimisation led to nearly 1/3rd lower consumption of stores and spare parts to Rs2.3bn vs Rs3.3bn in CY19, while rates and taxes were reduced to Rs770mn vs Rs1.4bn in CY19 and ad spends halved from Rs1.1bn in CY19. While some of these costs will normalise with volume recovery, ACC remains confident to achieve targeted cost savings of ~Rs200/te via optimising logistic costs, manufacturing excellence and fixed cost rationalisation. CY20 employee costs included one-time cost of Rs210mn towards employee separation costs.

* Achieved synergies worth ~5% of CY20 PBT or Rs0.8-0.9bn via MSA with ACEM: Cement / clinker swaps with ACEM gained increased traction with volumes and synergies rising significantly YoY in CY20. Purchase of goods from ACEM increased to Rs5bn from Rs1.1bn in CY19, while sale of goods to ACEM doubled from Rs1bn in CY19 to Rs2.2bn. Besides, network optimisation and better realisation with change in market mix will also add to improved profitability.

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