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Ongoing expansions on track; fuel cost stays nearterm concern…

About the stock: ACC (a Holcim group company) is a large cement player with capacity of over 34.5 MT 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 and operating margins vs. peer companies

The ongoing capex of | 3500 crore would increase its capacity to 39.3 MT by CY22E. GU in Sindri & Tikaria has already been commissioned, balance 3.2 MT new capacities are progressing as per schedule

Q1CY22 Results: ACC reported a mixed set of numbers for Q1CY22.

Revenues were up 3.1%YoY led by higher realisations (up 6.6% YoY). Sales volume was down 3.3% YoY to 7.71 MT (I-direct estimate: 7.2 MT)

Absolute EBITDA at | 634.6 crore (down 26.2% YoY, up 14.1% QoQ), higher than estimated EBITDA of | 576.9 crore due to lower RM & freight cost. Reported EBITDA/t came in at | 823/t vs. our estimated EBITDA/t of | 735/t

PAT of | 396.3 crore was down 29.6% YoY. However, it was higher than expected PAT of | 344 crore for the quarter

What should investors do? ACC’s share price has grown by ~1.9x over the past three years (from ~| 1350 in February 2019 to ~| 2570 levels in November 2021).

Given the healthy demand outlook and comfortable valuations, we remain positive and retain our BUY rating on the stock

Target Price and Valuation: We value ACC at | 2600 i.e.12x CY23E EV/EBITDA

Key triggers for future price performance:

The company is raising its capacity to 39.3 MT. This entails a capex of ~| 3500 crore, which would be funded through internal accruals

Efficiency measures taken under Project Parvat are visible. The cost gap between ACC and other large players has shrunk to ~9% vs. ~15% earlier

The potential exit of Holcim from India to keep supporting valuations given its size and brand value as it is available at ~24% discount to its current replacement value

Alternate Stock Idea: Besides ACC, in our cement coverage we also like UltraTech

It is a market leader with a 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 | 8000/share

Key performance highlights

Sales volume dipped 3.3% YoY to 7.71 MT (lower than I-direct estimate: 7.9 MT). Realisations remained in line with estimates and were up 6.6% YoY to | 5,741/t  Capacity utilisation was at 89% vs. 92% last year. RMC revenues came in at | 395 crore, up 10% YoY, 19.2% QoQ due to opening-up of urban economy

Production cost broadly remained flat QoQ to | 4,918/t while it was up 14.2% YoY. Power & fuel cost was up 33.6% YoY. On a QoQ basis, it was up 7.4%. However, that was partly offset by lower employee (down 8% QoQ) and RM expenses (down 12% QoQ due to inventory adjustments)

Efficiency project ‘Parvat’ helped deliver 1% lower per ton freight & forwarding cost despite fuel inflation

EBITDA/t of | 823/t (down 23.7% YoY, up 10.8% QoQ) remained better than our estimated EBITDA/t of | 735/t

PAT of | 396.3 crore remained higher than our estimates of | 344 crore due to better-than-expected margins

ACC commissioned its 1.6 MT GU at Tikaria, Uttar Pradesh in February 2022. Total cement capacity was 36.1 MT. The 2.7 MT clinker and 1 MT GU in Ametha may get commissioned by Q4CY22. Balance 2.2 MT GU at Salai Banwa UP is expected to come on stream in CY23. All this capex is funded via internal accruals

Further efficiency projects like waste heat recovery (Jamul 10 MW, Kymore 14 MW) are also on track. They would get commissioned by Q2CY22E. The board has also approved WHRS project at Chanda and Wadi. Post these, total WHRS capacity is expected to increase to 75 MW

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