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Muted earnings, positive outlook

The Adani group’s ACC Ltd (ACC) is a leading Indian cement company with 18 cement plants, 9 captive power plants and 82+ ready-mix concrete (RMC) plants.

* In Q1FY25, ACC’s consolidated revenue fell 0.9% YoY to Rs. 5,155cr on low output prices. While volume grew 8.5% YoY to 10.2 MT owing to higher sales from premium products and value-added services.

* EBITDA declined 11.9% YoY to Rs. 679cr because of lower revenues.

* ACC delivered muted earnings owing to low output prices. However, it saw steady volume growth, which helped it offset the revenue decline. Additionally, the company's cost control initiatives delivered results in the quarter, leading to cost reduction in certain areas. We expect such efficient cost measures and volume growth to continue in the future. Therefore, we reiterate our ACCUMULATE rating on the stock, with a target price of Rs. 2,674 based on 10.5x FY26E EV/EBITDA.

Volume increase offset top-line decline

In Q1FY25, ACC’s sales volume grew 8.5% YoY to 10.2 MT, driven by growth in premium products and value-added services, beyond cements. However, despite the growth in volume, revenue declined 0.9% YoY to Rs. 5,155cr owing to low product prices. Product prices fell Rs. 370-380 per tonne during the quarter, primarily owing to the impact of unfavourable monsoon and elections. Nevertheless, the company expects the output prices to normalise and increase after Diwali, which should help boost the company's revenue.

Cost initiatives to continue to support margin

In Q1FY25, EBITDA decreased 11.9% YoY to Rs. 679cr and EBITDA margin fell 160bps YoY to 13.2%, primarily because of lower revenue and elevated raw material costs. The raw material cost per tonne increased 8.3% YoY to Rs. 781 per tonne, driven by clinker purchases. However, the management expects to establish long-term ties with suppliers to provide key raw materials at optimised costs in the near future. On the other hand, power and fuel costs per tonne decreased 18.1% YoY to Rs. 974 per tonne owing to a shift towards a more efficient WHRS power mix and maximisation of alternative fuel consumption. Additionally, captive coal consumption reduced kiln fuel cost from Rs. 2.14 to Rs. 1.73/’000 kCal. Freight and forwarding costs per tonne also decreased 14.2% YoY and are expected to reduce further in the near term.

Key highlights

* The Adani group recently acquired Penna Cement (14 MTPA capacity) through Ambuja Cement. The move is expected to bring synergies in terms of delivering good quality and low-cost clinker to ACC’s southern units going forward.

* The management indicated that the ongoing capex of ~Rs. 1,000cr for building offices in Ahmedabad and Delhi would keep capex cost high. Investments in the Rajpura unit and modernisation of the Wadi unit will also add to the capex cost.

Valuation

The improvement in output product prices is expected to commence by Q3FY25 following the monsoon season, which could support the top-line growth. The heavy infrastructure capex announced in the budget is likely to support the elevated demand and volume growth. Moreover, ACC's commitment to reducing costs at the Adani group level should further contribute to the company's long-term performance. Currently, the stock is trading at 10.6x FY26E EV/ EBITDA, lower than its historical five-year average EV/ EBITDA of 12.4x. Therefore, we reiterate our ACCUMULATE rating on the stock, with a target price of Rs. 2,674 based on 10.5x FY26E EV/EBITDA.

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