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Cost structure improves; capacity expansion drives growth

The key highlights of ACEM’s FY24 annual report: 1) initiated capacity expansion projects of 20mtpa spread across regions to increase its capacity to 100mtpa by FY26-end; 2) aggressively expanding its green energy portfolio with investments of INR100b and planning to increase green energy share to ~60% by FY28 from ~16% currently; and 3) maintains a positive outlook on the Indian cement industry and expects demand growth of ~8-9% YoY in FY25. ACEM expects ~150- 160mtpa capacity addition in the industry over the next five years. Further, demand CAGR of ~8-9% over FY24-28E would surpass supply CAGR at 6-7% over the same period.

Ambitious capacity target of 140mtpa by FY28

* ACEM reiterated its capacity target (consolidated) of 140mtpa by FY28 vs. the current 78.9mtpa (including Tuticorin grinding unit acquired in Apr’24). The company has initiated capacity expansion projects of 20mtpa across regions to reach 100mtpa capacity by FY26-end.

* In addition to the ongoing 20mtpa expansion projects, the board approved a 2.25mtpa clinker unit in Mundra, Gujarat (calcium hydroxide process), and 17 grinding units (2.4mtpa each) at different locations across the country (including 4mtpa proposed at Godda, Jharkhand). Land acquisitions and statutory approvals for these projects are in progress.

* ACEM’s consolidated sales volumes grew ~8% YoY (like-to-like comparison) to 59.2mt. The company’s cement capacity utilization stood at ~82% in FY24 vs. ~81% in FY23 (annualized, since FY23 was a 15-month period). We estimate the company’s consol. volume CAGR of ~9% over FY24-26E.

Cost reduction initiatives help to improve profitability

* In FY24, the company’s opex/t (consol.) declined (on a like-to-like comparison) by INR475 to INR4,523, driven by a reduction in input costs, freight costs and other fixed overheads.

* In FY24, the company commissioned ~69MW of WHRS capacity (53MW in ACEM and 16MW in ACC). The company’s green power share (consol.) increased to ~16% in FY24 vs. ~7-8% in FY23. It targets to increase WHRS/Solar & Wind capacity to 376MW/1GW by FY28 and renewable power share to 60%.

* It is increasing alternative fuel (AFR) to reduce costs and carbon footprint. ACEM installed AFR pre-processing and feeding systems and implemented a gas bypass system to increase the utilization of AFR. ACEM achieved a thermal substitution rate (TSR) of 7.76% and targets to increase it to ~23% by FY30.

Capital infusion by promoter and internal accruals to support growth plan

* ACEM capitalized property, plant and equipment (standalone) worth INR12.3b in FY24. Total capex (standalone) in FY24 stood at INR20b vs. INR21b in FY23. We estimate capex (standalone) of INR40b/INR41b in FY25/FY26, given the expansion plans announced by the company.

* ACEM’s CFO (standalone) stood at INR31.6b in FY24 vs. INR20.0b in FY23 (15- month period), driven by improvement in profitability. The company’s FCF stood at INR11.7b in FY24 vs. cash outflow of INR1.0b in FY23. We expect CFO to improve in FY25/FY26, led by profitability improvement. However, given the robust expansion plan, we estimate low FCF generation over FY25/FY26.

* The company’s standalone cash and cash equivalent (including current investment) increased to INR131b as of Mar’24 vs. INR85b as of Mar’23. Its consolidated cash and cash equivalent (including current investment) surged to INR160b vs. INR115b as of Mar’23. We believe higher cash balance will support the company’s organic and inorganic (if any) growth plans.

Valuation and view

* The company is focusing on further cost reduction by increasing the share of green power and AFR, engaging in long-term procurement strategies for critical raw materials, and optimizing logistics. A successful execution of these plans could result in a positive surprise.

* ACEM reiterated its capacity target of 140mtpa by FY28, for which work is in progress at different stages. Although the company has ambitious growth plans, it has placed orders for only two kilns with an aggregate production capacity of 8mtpa till now. The stock trades at 19x/16x FY25E/FY26E EV/EBITDA. We maintain our Neutral rating with a TP of INR640, based on 16x FY26E EV/EBITDA

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