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Targets cost reduction of INR300-400/t in FY24

* ACEM’s operating performance in the Jan-Mar’23 quarter was in line with our estimates, with EBITDA at INR7.9b (est. INR7.8b) and EBITDA/t at INR977 (est. INR951). Higher other income and a lower tax rate led to a ~21% beat in adjusted PAT at INR5.6b.

* The management aims to double the grinding capacity to 140mtpa in the next five years and has outlined the first phase of expansion of ~11mtpa (orders will be placed in the near term). It targets cost reductions of INR300- 400/t and aims to achieve EBITDA/t of INR1,200-1,400/t in FY24.

* We largely maintain our earnings estimates, with EBITDA/t assumptions of INR1,078/INR1,162 in FY24E/25E. Cost-saving strategies and equipment ordering will be key monitorables for a constructive view on the company. We maintain a Neutral rating with a revised price target of INR390, based on 15x FY25E EV/EBITDA (v/s Sep’24E earlier).

Sales volumes up 8% YoY; opex/t down 5% QoQ

* ACEM’s standalone revenue/EBITDA/adj. PAT stood at INR42.6b/INR7.9b/ INR5.6b (up 8%/down 1%/up 14% YoY and down 3%/up 1%/21% v/s our estimates). Sales volumes grew 8% YoY/5% QoQ to 8.1mt. Realization improved 1% YoY (declined 1% QoQ).

* Opex/t was up 3% YoY (down 5% QoQ) due to a 13% rise in variable costs. Other expenses/t declined 22% YoY/19% QoQ. OPM was down 1.7pp YoY (up 3.4pp QoQ) at 18.5%. EBITDA/t declined 8% YoY (+20% QoQ) to INR977.

* During Apr’22-Mar’23, revenue grew 12% YoY, aided by 11%/1% YoY growth in volume/realization. EBITDA declined 21% YoY to INR24b due to cost pressure (opex/t up 9% YoY). EBITDA/t was down 28% YoY at INR795. Adjusted PAT rose 3% YoY to INR20b, aided by higher other income.

Highlights from the management commentary

* Management targets a cost reduction of INR 300-400/t through optimizing energy costs (INR200/t), transportation costs (INR100/t) and other costs. Cost-saving initiatives and capacity expansion would help to double the group’s (ACC+ACEM) topline by FY28, with EBITDA margin expansion of 600bp (from last three years average). ACEM targets EBITDA/t of INR1,470 in FY28 (INR1,200-1,400/t in FY24E).

* Kiln fuel costs fell 10% QoQ (to INR2.21/Kcal from INR2.45/Kcal), with a change in the coal mix and group synergies on coal procurement. Working capital improvement remains in focus and working capital turnover improved by 8 days.

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