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On an expansion mode

ACC reported lower-than-expected EBITDA of Rs5.5bn (CentrumE: Rs6.9bn), down 22% QoQ/ 21% YoY and blended EBITDA/t of Rs741 (CentrumE: Rs927), down ~32% QoQ/ 18% YoY. The sequential decline in EBITDA was due to high coal cost which increased total cement CoP by ~7% QoQ. Benefits of market supply agreement with its parent, Ambuja Cement (ACEM), is visible and logistics cost is down and was in control. ACC’s cement capacity has increased at a slower pace (capacity increased by ~14%) in last decade which is expected to be accelerated now. ACC is expanding overall capacity from currently 34.5mtpa to 45-50mtpa in next three-four years. This comforts medium term growth outlook for the company along with cost efficiency will drive incremental margins. With fall in stock and visibility of future growth, we upgrade stock to BUY with target price of Rs2736 valuing 11x average of CY22/CY23E EV/EBITDA.

Higher volumes QoQ despite weak demand

Net sales increased 13% QoQ (up 1.8% YoY) to Rs41.4bn (CentrumE: Rs42bn). The sequential increase was due to 14% QoQ increase in cement volume to 7.49mt while cement realisation/t declined marginally by Rs35/t QoQ to Rs5,033/t. RMC revenues were up ~9% QoQ at Rs3.32bn with improvement in RMC volumes (up 7% QoQ).

EBITDA dips due to cost inflation

Cement operating cost/t increased by 6.9% QoQ/7.4% YoY to Rs4,460/t, driven by higher input cost inflation, primarily coal. RM cost incl change in inventory was up 77% QoQ to Rs969/t. The high coal cost led to higher power & fuel cost which was up by 4.7% QoQ (up 29% YoY) to Rs1,255/t. Freight cost, at Rs1,289/t, was down 2% QoQ despite higher diesel prices due to network optimization. The higher cost led blended EBITDA/t to decline by Rs342/t QoQ to Rs741/t. Cement-related EBITDA/t declined by Rs340/t QoQ (down by Rs141/t YoY) to Rs687/t.

Ongoing capacity expansion to 45-50mtpa in next 3-4 years

The brownfield capacity expansion at Tikaria of 1.6mtpa is near completion while greenfield expansion at Ametha, Madhya Pradesh (integrated unit with clinker capacity of 2.7mtpa and grinding capacity of 1mtpa), is expected to be commissioned by Oct 2022 end (earlier expected by CY22 end). Moreover, greenfield project of grinding unit expansion of 2.2mtpa in Salai banwa is on track of implementation. Overall ACC is expected to add 4.8mtpa cement capacity by CY23 and aim to take overall capacity to 45-50mtpa in next 3-4 years.

On an expansion mode-Upgrade to BUY

We believe earnings for ACC have bottomed out in Q4CY21 and margins are expected to improve in subsequent quarters. ACC will embark on further capacity expansion taking total capacity to 45-50mtpa by CY25 (announced projects will take capacity to 39.3mtpa by CY23). The current ongoing expansion will help in ~6% volume CAGR during CY21-23E to 32.5mt. Benefits of market supply agreement with its parent, Ambuja Cement (ACEM), are expected to keep logistics cost in control and commissioning of waste heat recovery units will enable energy cost savings, aiding earnings growth. We upgrade the stock to BUY with target price of Rs2,736

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