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Cost saving strategies yielding results

Operating performance marginally above our estimate

* ACC’s 3QCY21 operating performance was marginally above our estimate, led by higher-than-estimated realization (down 2% QoQ v/s our estimate of a 3% decline). EBITDA stood at INR7.1b (est. INR6.9b). EBITDA/t stood at INR1,083 (est. INR1,021).

* Its expansion plans are largely on track. It is likely to commission clinker/grinding capacity of 2.7mtpa/2.6mtpa by 1HCY22E and additional grinding capacity of 2.2mtpa by 1HCY23E. This should drive 9% volume CAGR over CY20-23E. Cost saving efficiencies (Project Parvat) and master supply agreement (MSA) with ACEM are yielding results. We maintain our CY21-23E EPS estimates and reiterate our Buy rating with a TP of INR2,692.

Better realizations offset cost inflation

* Revenue/EBITDA/adjusted PAT increased by 6%/6%/12% YoY in 3QCY21 to INR37.5b/INR7.1b/INR4.5b and was -1%/+4%/+6% v/s our estimates. EBITDA margin stood at 19% v/s our estimate of 18%.

* Volumes rose 1% YoY to 6.57mt (est. 6.71mt). Cement realization fell 2% QoQ, better than our estimate of a 3% decline. Higher sales in better priced markets (Central India) helped ACC report better-than-estimated realization. RMC revenue rose 54% YoY and 19% QoQ.

* Blended cost/t stood in line at INR4,623 (+5% QoQ, +5% YoY) as the impact of energy cost inflation was offset by lower than expected freight cost. The variable cost of production rose INR131/t YoY and INR201/t QoQ.

* Revenue/EBITDA/adjusted PAT increased by 24%/37%/51% YoY in 9MCY21 to INR119.3b/INR24.5b/INR15.8b, led by a 20% rise in volume to 21.38mt and 2pp improvement in EBITDA margin to 20.5%. EBITDA/t stood at INR1,124 v/s INR1,012 in 9MCY20.

Highlights from the management commentary

* Demand outlook: The management expects the strong demand to continue going forward, led by an improvement in housing demand (growth in urban housing, Real Estate, and Pradhan Mantri Awas Yojana), government’s focus on Infrastructure development (national infrastructure projects, higher spends on roads/highways, increase in allocation for Indian Railways, etc.), and a demand revival in Industrial and Commercial Construction (implementation of production linked schemes and increase in warehousing space due to the boom in e-commerce).

* Capacity expansion plans in Central India are progressing well. Grinding capacity of 1.6mtpa in Tikaria, Uttar Pradesh and the integrated plant with a clinker/grinding capacity of 2.7mtpa/1mtpa in Ametha, Madhya Pradesh will be commissioned by 1HCY22E. Another grinding unit of 2.2mtpa capacity in Shonebhadra, Uttar Pradesh will be commissioned by 1HCY23E. The Waste Heat Recovery System of 24MW (10MW in Jamul, Chhattisgarh and 14MW in Kymore, Madhya Pradesh) is expected to be commissioned by CY22E.

* ACC operated at 79% utilization in 9MCY21.

* Raw material cost inflation was partially mitigated by cost savings from Project Parvat, while other expenses were higher due to higher packing material and maintenance costs.

* To mitigate the impact of rising diesel costs, the management continued to focus on geographical-mix improvement, direct dispatches, network optimization, and procurement savings. This led to a 1% YoY decline in freight cost/t.

* The RMC business is witnessing a demand uptick. A margin revival is evident from the 46% YoY growth in sales volume at 0.68 cu.m. EBITDA margin for this segment stood at 4.9% in 9MCY21 v/s an operating loss in 9MCY20.

Valuation and view

* Volume improved over CY17-19 after remaining stagnant over CY11-16, which helped to arrest the market share loss seen over CY09-16. Going forward, we expect ACC to benefit from capacity expansions in Central India.

* It benefited from cost saving strategies (Project Parvat was initiated in CY19 to reduce operating costs by INR200/t till CY21) and the MSA with ACEM (intercompany purchases rose 15%/32% in 3Q/9MCY21).

* We value ACC at 11x Sep’23E EV/EBITDA (in line with its long term average of 10.7x) to arrive at our TP of INR2,692. This implies a target EV/t of USD133 on a CY22E basis. We maintain our Buy rating.

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