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Capacity expansion of 14mtpa to be completed in the next 24 months

* ACEM reported significantly higher EBITDA (23% above our estimate), led by strong volume growth and increased cost-reduction measures. EBITDA grew 39% YoY to INR9.5b (est. INR7.7b). EBITDA/t stood at INR1,045 (vs. est. INR984) and OPM surged 3pp YoY to 20% (est. 18.6%). Adj. PAT was down ~28% YoY, due to dividend income from ACC in the same quarter previous year.

* The management reiterated its expansion plan of doubling grinding capacity to 140mtpa by FY28. In the first phase, it has outlined capacity expansion of 14mtpa, which will be completed in the next 24 months. It targets sustainable cost reductions of INR400/t through lower energy, freight, and other costs.

* We raise our FY24E/FY25E EBITDA by 13%/12%, given the outperformance in 1QFY24. ACEM trades at 17.7x/16.3x FY24E/FY25E EV/EBITDA. We maintain our Neutral rating with a revised TP of INR450, based on 15x FY25E EV/EBITDA.

Sales volumes up 23% YoY; opex/t down 7% YoY

* ACEM’s standalone revenue/EBITDA/adj. PAT stood at INR47b/INR9.5b/ INR6.4b (up 18%/up 39%/down 28% YoY and 14%/23%/19% above our estimate). Sales volumes grew 23% YoY to 9.1mt (16% above estimate). Realization declined 4% YoY (2% below estimate).

* Opex/t declined 7% YoY, led by 25%/6% YoY decline in freight cost/other expense. While variable cost/t was up 2% YoY (5% below estimate), employee cost declined 15% YoY to INR1.3b.

* OPM was up 3pp YoY at 20%. EBITDA/t was up 13% YoY to INR1,045. Lower ‘other income’ was due to the absence of dividend income in this quarter.

Highlights from the management commentary

* Consolidated volume growth of 9% YoY in 1QFY24 was in line with the industry. It targets volume growth of 10-15% consolidated level in FY24. Cement prices have remained largely flat in this quarter.

* Kiln fuel costs fell 17% YoY to INR2.07/Kcal as the company benefitted from its tie-ups with different sources. Fuel cost will decline further with increasing usage of coal from its captive coal mines.

* Capex (consolidated) stood at INR5.7b in 1QFY24. Out of this, INR3b pertains to ACEM and the remaining INR2.7n for ACC. Capex is pegged at INR70b in FY24, out of which 60-65% is for ACEM and the remaining for ACC.

Valuation and view

* ACEM’s (consolidated) cash balance increased INR410m (from Mar’23) to INR119b as of Jun’23, despite a capex of INR5.7b.

* The company has delivered strong performance, led by better volumes and increased cost-reduction measures. We will monitor the sustainability of cost-saving measures and the progress in improving profitability. Valuation at 17.7x/16.3x FY24E/FY25E EV/EBITDA appears rich. We maintain our Neutral rating on the stock with a revised TP of INR450, valued at 15x FY25E EV/EBITDA.

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