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Healthy operational performance…

ACC’s Q1CY21 performance was ahead of our estimates led by better sales volumes and higher margins. Sales volume increased 21.5% YoY to 7.97 MT (up 3.4% QoQ) while realisations increased 0.9% YoY (flat QoQ) to | 5,385/t leading to revenue growth of 22.6% YoY to | 4292 crore. Strong demand along with lower base of last year and partial benefit of new capacity (1.4 MT) led to healthy sales volume growth.

However, RMC volumes fell 10.7% YoY to 0.83 million cubic metre (up 14.7% QoQ). Reported EBITDA margin came in at 20% (up 330 bps YoY, 625 bps QoQ), higher than our estimate of 16.5% due to volume led operating leverage and lower other costs. Absolute EBITDA increased 46.7% YoY to | 860.3 crore. EBITDA/t was at | 1079/t (Idirect estimate: | 891/t) vs. | 894/t last year, | 742/t last quarter. The company commissioned a new grinding unit (1.4 MT) in January 2021 at Sindri, Jharkhand. Further greenfield expansion in Ametha and associated grinding units are on track.

New capacities to help gain lost ground from CY22E onwards

Over the past five years, ACC has lost market share to other large players with no major new capacities coming up during this period either through greenfield or M&A route. While industry capacity grew at 7% CAGR, the company managed to increase its capacity from 30.5 MT to 33 MT i.e. at 2% CAGR. As a result, ACC’s production share declined from 14% in FY14 to 11% in FY20. To address this growth concern, the company is increasing its capacity to 39.3 MT with total capex of ~| 3000 crore. This would be mainly funded through internal accruals. However, the new capacity would likely come on stream only by the end of H1CY22E. Thus, we model a volume CAGR of 11.7% in CY20-22E and expect revenues to grow at 12.8% CAGR over the same period.

Cost rationalisation to bring efficiency; b/s to remain firm

ACC despite being the oldest cement company remains susceptible to volatility in margins due to its high cost of production (CoP). To bring down costs, the company undertook various cos saving initiatives across its plant under “Parvat Programme”. This move helped ACC achieve cost saving of | 110/tonne resulting in cost savings of over | 250 crore in CY20. Still, the company closed CY20 with CoP of | 4472/t, i.e. 15% higher than industry average CoP. ACC aims to bring down the cost by | 200/t via optimising logistic costs, manufacturing excellence and fixed cost rationalisation. In terms of b/s, it is among the strongest in the industry with positive FCF generation and a debt free position.

Valuation & Outlook

While structural issues w.r.t CoP need to be addressed for sustenance of healthy margins, strong b/s and improved cash flow remain key positives. Further, new capacities would bring growth back on track. The Covid induced lockdown may impact sales in the near-term. However, strong underlying demand should help the company recover lost volumes as and when normalcy resumes. Hence, we retain BUY and maintain TP of | 2,250 (valuing at 11.5x CY22E EV/EBITDA implying an EV/t of ~$135).

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