IGI Logo

We downgrade ACC to SELL from Buy and cut our TP by 30% to Rs1,600 (from Rs2,280), as we lower our EV/E multiple to 7x from 9x besides chopping FY27E EBITDA by ~12% (FY26E EBITDA is broadly unchanged). We see higher intergroup transactions as an impediment to ACC’s margins, working capital, capex, and consequent growth, viz also evident in the recent quarterly results. Hence, we prefer Ambuja Cements (ACEM; ADD) over ACC to play the group’s common goal of achieving superior profitability (Rs1,500/t), capacity (155mtpa), strong market share, and brand equity.

The lower multiple is based on various factors. 1) Widening margin (in terms of both share and per-ton basis) gap between ACEM (consol) and ACC under the Adani regime. 2) Sharp rise in traded goods (in the past ~3 years) constraining ACC’s ability to premiumize its products that hurt margins. Going forward, we see continued rise in share of traded goods for ACC, as the consolidated entity (ACEM) aims to reduce operational cost by ~Rs500/t through group adjacencies by FY28. 3) Increased trading between group companies resulting in higher working capital requirements for ACC, as the number of its net working capital (WC) days have risen to 57 as of Sep-25 vs negative WC requirement of 2 days in CY21. Consequently, the company saw its cash and cash equivalent levels dropping to a multi-year low (~Rs8bn) in Sep-25. 4) ACC is likely to witness sub-par capacity CAGR of a mere ~7% over FY25-28E. Further, per the latest management guidance, ACC would depend on ACEM for its clinker requirements. Hence, we believe the margin gap—between ACEM (consol) and ACC—would continue to widen, as the group targets uniting synergies emanating from individual companies under one consolidated entity, viz ACEM.

Further, in its bid to simplify the group structure, ACEM may look to merge ACC as well (Sanghi and Penna at advanced stages of merger), in our view. However, we see the likely merger ratio being neutral for both entities and hence restricting any windfall gains in ACC’s stock. At CMP, ACC is trading at ~8x 1YF EV/E which is a sharp fall from the 10-year average level of ~13x.

Sharp rise in quantum of traded goods hurting margins… Execution of the master supply agreement (MSA) between ACC and Ambuja Cements has picked up pace under the Adani regime as, based on our assumptions, the traded volumes (as a % of ACC’s overall volume) have doubled in the past 10 quarters. However, the rise in traded goods has not translated into margin expansion/robustness for ACC, as the average divergence with the consolidated entity has widened to 430bps in the past ~3Y vs 235bps under the Holcim regime (Exhibit 1). We believe such divergence will widen as the consolidated entity marches toward its goal of achieving Rs3,650/t by FY28 (one of the levers will be driving group synergies, implying higher MSA volumes).

For More  Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354