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Cost pressures hurt; increasing focus on green energy

RMC segment reports an improved performance

ACC’s 1QCY22 result was weak as anticipated as energy costs continue to remain at elevated levels. Variable cost/t rose 29% YoY, but fell 2.6% QoQ. Higher cost led to a 26% YoY decline in EBITDA and a 5.7pp YoY drop in OPM. Profit fell 30% YoY.

The better performance of the RMC segment (EBIT margin of 7% v/s 4.6% in 4QCY21), along with higher other operating income, helped ACC to marginally beat our EBITDA estimate by 3%. Profit at INR3.9b was 8% above our estimate.

We have left unchanged our CY22E/CY23E earnings estimates. Despite nearterm challenges due to higher coal/petcoke prices, we maintain our positive stance on the sector given the robust demand outlook. ACC’s capex plans are progressing as per schedule. We maintain our Buy rating on attractive valuations (CY23E EV/EBITDA of 9.1x and EV/t of USD112).

Volume (-3% YoY) and realization (+5%) each 1% below our estimate

Revenue/EBITDA/adjusted PAT stood at INR44.3b/INR6.3b/INR3.9b (+3%/- 26%/-30% YoY and +1%/+3%/+8% v/s our estimate). Cement sales volumes fell 3% YoY (up 3% QoQ) to 7.71mt (est. 7.79mt). RMC sales volumes were up 5% YoY to 0.87cubic meters (8% above our estimate)

Grey Cement realization improved by 5% YoY (but was flat QoQ, 1% below our estimate). Blended realization rose 7% YoY and 2% QoQ on higher RMC revenue (up 10% YoY and 19% QoQ)

Blended cost/t grew 14% YoY (flat QoQ), led by higher variable costs (higher coal/petcoke prices). Other expenditure/t rose 7% YoY due to an increase in packaging costs, while employee cost/t fell 3% YoY.

Impacted by higher costs, blended EBITDA/t stood at INR822 v/s INR1,078/INR741 in 1QCY21/4QCY21 (est. INR746/t).

Highlights from the management commentary

Cement demand should improve, led by: 1) affordable housing under the PMAY scheme (Urban and Rural) and a likely pick-up in Real Estate, 2) government’s Infrastructure projects, and 3) likely pick-up in industrial/ commercial demand, led by implementation of production-linked schemes, increase in Warehousing space due to the e-commerce boom, and improvement in the industry-capex cycle.

Grinding capacity of 1.6mtpa in Tikaria, Uttar Pradesh (UP) was commissioned in Feb’22. The integrated plant with a clinker/grinding capacity of 2.7mtpa/1mtpa in Ametha (Madhya Pradesh), along with 16.3MW of WHRS (Waste Heat Recovery System), is expected to be commissioned by 4QCY22. A grinding unit of 2.2mtpa in Sonbhadra, UP is expected to get commissioned by 1HCY23.

WHRS of 24MW (10MW in Jamul, Chhattisgarh and 14MW in Kymore, Madhya Pradesh) is on track and is expected to get commissioned in 2QCY22. New WHRS projects (~29MW) at Chanda (Maharashtra) and Wadi (Karnataka) have been finalized. ACC’s total WHRS capacity will increase to 75MW from the current 7.5MW.

Capacity expansion and cost improvement measures should help; Buy

We expect ACC to benefit from its capacity expansion plans in Central India. Benefits from cost-saving strategies (Project Parvat and MSA with ACEM) are expected to continue going forward. The management had earlier expected further cost savings of INR100-150/t from these initiatives.

The company is well-placed to pursue growth opportunities as it will have a net cash of INR79b in CY23E v/s INR74.4b in CY21, despite a growth capex of INR30b over CY22-23E. The management said it will increase capacity to 45-50mtpa over the next two-to-three years.

ACC trades at 12.2x/9.1x CY22E/CY23E EV/EBITDA and USD118/USD112 CY22E/CY23E EV/t. We value ACC at 11.5x CY23E EV/EBITDA (v/s its 10-year average EV/EBITDA of 12x) to arrive at our TP of INR2,485. We maintain our Buy rating on the stock. In the near-term, news flows regarding Holcim’s possible exit from India will keep the stock in focus

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