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Improving margins to narrow valuation gap

ACC’s Q3CY21 EBITDA at Rs7.1bn (up 6% YoY) was broadly in line with consensus estimates. Total cost/te increased 4.6% QoQ (6.8% YoY) primarily led by higher fuel cost, and packing materials and maintenance costs. Blended EBITDA/te (including RMC) grew 7% YoY and declined 15% QoQ to Rs1,060/te (ISec: Rs977/te). While investor concern around sharp cost increases seem valid, industry has demonstrated strong pricing resilience in the past. Our recent channel checks suggest companies have increased prices by Rs15-20/bag across regions. We believe ACC with its large pan-India diversified market presence, premium brand positioning and increased focus on cost efficiencies is better placed to sustain / improve margins in the medium term. We maintain BUY with revised target price of Rs2,710/share (earlier: Rs2,610) based on 11x Sep’23E EV/E on quarterly rollover. Key risks: Lower demand/prices.

* Revenues grew 5% YoY to Rs36.5bn in line with our estimates: Grey cement realisation declined 1.8% QoQ (up 3.7% YoY) to Rs5,058/te owing to ~2% sequential decline in average pan-India prices (up ~4-5% YoY). Volumes including clinker sales remained flat YoY (>75% utilisation) and declined ~4% QoQ. Management believes government focus on infrastructure and housing coupled with increase in demand from various sectors such as commercial and industrial construction augurs well for cement demand in the coming quarters.

* RMC revenues grew 55% YoY to Rs3bn owing to 48% YoY volume growth aided by growth of ECOPact concrete range. RMX EBIT came in at Rs109mn against a loss of Rs284mn in Q3CY20 and EBIT of Rs27mn in Q2CY21. Other operating income rose 37% YoY / 28% QoQ to Rs957mn.

* Cement EBITDA/te increased 1% YoY and declined 17% QoQ to Rs1,027/te while blended EBITDA/te (including RMC) grew 7% YoY and declined 15% QoQ to Rs1,060/te. Cement cost/te rose 3.7% QoQ / 5.2% YoY to Rs4,171/te. Raw material plus power and fuel cost/te rose 9% QoQ and 4% YoY impacted by higher fuel prices and various input cost inflations, which was partially mitigated through cost-efficiency actions taken under project Parvat – including clinker factor optimisation, reduction in energy consumption, fuel mix optimisation, etc. Freight cost/te was down 3% QoQ (flat YoY) owing to geographic mix and network optimisation despite rising diesel costs. Other expenses/te were up 2% QoQ / 19% YoY on account of general inflation, and higher packing materials and maintenance costs. PAT increased 24% YoY to Rs4.5bn (I-Sec: Rs4.2bn) aided by lower tax rate of 26% vs 33% YoY.

* Capacity expansion projects in MP (clinker 2.7mnte and cement grinding 1.0mnte) and split cement grinding unit (3.8mnte) in UP remain on track. WHRS projects at Jamul (10MW) and Kymore (14MW) are also progressing as planned.

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