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New capacity to aid near-term volume growth

Further expansion plans need to be monitored

*  ACEM’s 3QCY21 earnings were impacted by higher costs (energy, freight, and other expense) as OPM declined by 2.2pp YoY (1.8pp below our estimates) and EBITDA/t fell 5% YoY (6% below our estimate).

* Its Marwar and Mudwa plant in North India has started commercial production and should aid volume growth in the near term. We largely maintain our CY21-23E EPS estimates and maintain our Neutral rating on the stock. Clarity on further growth plans will be a key factor to monitor.

Higher cost leads to 5% miss on EBITDA

* Revenue/EBITDA/adjusted PAT increased by 13%/3%/nil YoY in 3QCY21 to INR32.4b/INR7b/INR4.4b and +3%/-5%/-8% v/s our estimate on the back of higher cost as EBITDA margin declined by 6.7pp QoQ and 2.2pp YoY to 21.7% (est. 23.5%).

* Volume (including clinker) rose 9% YoY to 6.20mt (-3% QoQ, est. 6.13mt). Cement volume increased by 6% YoY.

* Blended cost/t increased by 9% QoQ and 7% YoY to INR4,087 (4% higher than our estimate) on account of higher than expected fuel and freight cost inflation. The same was partially offset by higher cement realization, which stood at INR5,150/t (est. of INR5,050/t). Variable cost of production rose 15% YoY and 12% QoQ. Higher ad spends, packaging cost, and travel expenses led to a 10% YoY and QoQ increase in other expense/t.

* EBITDA/t declined by 24% QoQ and 5% YoY to INR1,134 (est. INR1,208).

* Revenue/EBITDA/adjusted PAT grew 30%/40%/41% YoY in 9MCY21 to INR102.3b/INR26.4b/INR18.3b, led by a 27% YoY increase in volumes to 19.86mt and a 1.9pp improvement in EBITDA margin to 25.8%.

Highlights from the management commentary

* Commercial production has commenced from Marwar and Mundwa integrated unit (3mtpa clinker; 1.8mtpa grinding unit). It has the potential to enhance cement sales by 5mt.

* In the medium term, cement demand will be driven by the government's continued focus on capital expenditure and rural demand, which is expected to be buoyant, backed by a revival in Agricultural activity.

* Production has started from the Gare Palma coal block, which will provide fuel linkage to the Bhatapara plant in East India. The railway siding at Rabriyawas has turned operational.

Valuation prices in growth outlook

* ACEM has recently commenced commercial production at Marwar and Mundwa in Rajasthan, which will help it achieve a 5mt growth in production (17.6% of CY20 installed capacities). We estimate 10.3% sales volume CAGR over CY20-23E, which should help it gain a market share of 40-50bp.

* It trades at 13.4x/11.7x CY22E/CY23E EV/EBITDA, which prices in its nearterm growth outlook. We maintain our Neutral rating and value the stock at 13x Sep’23E EV/EBITDA to arrive at our TP of INR410. We have not ascribed any holding company discount for its stake in ACC.

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