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Rising cost a challenge; new capex plans announced

Higher energy costs impacted performance in 4QCY21

ACEM’s 4QCY21 result was significantly below our estimates due to higher variable costs (up 28% YoY and 25% QoQ). EBITDA stood at INR5.7b (est. INR6.7b). EBITDA/t came in at INR793 (est. INR1,043). Adjusted profit stood at INR3b (est. INR4.1b).

As expected, increased opex (up 14% YoY) dented profitability. EBITDA fell 26% YoY, while adjusted profit (adjusted for an additional charge on restructuring cost) fell 40% YoY

We reduce our CY22E/CY23E EBITDA estimate by 15%/5%, considering a steep increase in energy costs. Our profit estimate for CY22E is being cut by a mere 6% (despite higher reduction in EBITDA), considering the higher dividend income from ACC. We reduce our CY23E profit estimate by 5%

The company has announced plans for increasing grinding capacities by 7mtpa in East India. Valuations at 15.3x/12x CY22/23E EV/EBITDA will restrict upside in the nearterm. We maintain our Neutralrating on ACEM.

EBITDA/t at a 11-quarter low, OPM down 6.6pp YoY

Standalone revenue/EBITDA/adjusted PAT stood at INR37.4b/INR5.7b/ INR3b (+6%/-26%/-40% YoY and +8%/-15%/-27% v/s our estimate).

Sales volume rose 2% YoY to 7.2mt (est. 6.44mt). Realization grew 5% YoY (flat QoQ) to INR5,217/t (3% below our estimate).

Opex/t rose 14% YoY and 8% QoQ led by increase in variable costs and other expense (up 17% YoY on higher branding, maintenance, and packaging costs). Employee cost declined by 4% YoY, leading to a 5% YoY drop in employee expense/t.

EBITDA/t stood at INR793 (a 11 quarter low) v/s INR1,089/INR1,134 in 4QCY20/3QCY21. OPM fell 6.6pp YoY to 15.2%. Depreciation expense grew 35% YoY on commissioning of new capacity. Other income fell 16% YoY.

In CY21, sales volume/realization increased by 19%/3% YoY, leading to a 23% YoY growth in revenue to INR139.6b. Opex/t rose 3% YoY. EBITDA increased by 21% YoY to INR32.1b. OPM stood at 23% v/s 23.3% in CY20; while EBITDA/t stood at INR1,187 v/s INR1,167. Adjusted PAT grew 19% YoY. The company announced a dividend of INR6.3/share.

CFO/FCF stood at INR24.7b/INR13.2b v/s INR26.1b/INR16.3b in CY20. Capex in CY21 stood at INR11.6b v/s INR9.9b in CY20. Inventory days rose to 38 days v/s 24 days in CY20, primarily due to coal inventory.

Highlights from the management commentary

Grinding capacity expansion of 7mtpa has been planned in East India considering the long-term growth potential of the region. Capacity utilization in the eastern region is expected to touch 85% by CY25, with an increase in the capacity share of top players (90% by CY25 v/s 82% now)

There was a 40km reduction in the direct lead distance, decrease in secondary lead, and higher direct dispatches in 4QCY21. Sales volume under the master supply agreement(MSA) with ACC rose 73% YoY in 4QCY21.

Cost savings of INR300/t have been achieved under the ‘I Can’ project in the last two years. Green power fulfills 4% of its Power requirements at present and will rise to 25-28%. Alternate fuel usage (AFR) stands at 5% and will increase to 15%/25% in the near/mediumterm

Earnings under pressure on rising costs; maintain Neutral

Change in the management’s strategy is visible as ACEM announced further expansion plans in the eastern region. Clinker capacity will be raised by 3.2mtpa at Bhatapara (Chhattisgarh) and grinding capacity will be increased by 7mtpa (Sankrail and Farakka in West Bengal and Barh in Bihar). Capex for these expansionsstand at INR35b.

The stock trades at 15.3x/12x CY22/CY23E EV/EBITDA (v/s its 10-year average one-year forward EV/EBITDA of 12.3x). There remain near-termuncertainties in its earnings outlook as the industry has not been able to raise pricesfor offsetting higher energy costs. We maintain our Neutralrating and value the stock at 13x CY23E EV/EBITDA to arrive at our TP of INR370.

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