ACC - Improving margin to narrow valuation gap - ICICI Securities

ACC's Q2CY20 EBITDA at Rs5.3bn (down 33% YoY) with blended EBITDA/te at Rs1,074/te was higher than our / consensus estimates mainly led by better-than-expected realisation (+10.3% QoQ) and improved cost efficiencies. Cement EBITDA/te increased 11% YoY to Rs1,127/te - highest in past 8 years and comparable to larger peers, with quarter exit EBITDA/te still higher than quarter average. With improving margin / return ratios, ACC's valuation gap with larger peers may narrow, in our view. Factoring-in better margin, we increase our CY20E-CY21E EBITDA by 3-11% and raise our target price to Rs1,625/share (earlier: Rs1,520) based on 9x Mar'22E EV/E. Maintain BUY.

- Revenue declined 38% YoY to Rs25.2bn (I-Sec: Rs25.8bn): Grey cement realisation increased 10.3% QoQ/ 0.8% YoY to Rs5,048/te led by price hike across regions especially sharp price hike of ~20% QoQ (~Rs900/te) in South region. Volumes including clinker sales declined 34% YoY to 4.9mnte owing to Covid-19 lockdown in Apr'20. However, there was sharp rebound in volumes in May-Jun'20. Management expects government's increased thrust on affordable housing and infrastructure coupled with improved rural housing demand would drive cement demand in the near-term.

- RMC revenue sharply declined 83% YoY to Rs622mn led by similar decline in volumes as major cities continued to be under different phases of lockdown. RMC EBITDA loss stood at Rs269mn vs EBITDA of Rs312mn in Q2CY19. Other operating income declined only 10% YoY/ increased 19% QoQ to Rs819mn.

- Cement cost/te declined 0.6% YoY / increased 5.3% QoQ to Rs4,085/te. Excluding higher purchase of third-party products (especially in East region), raw material plus power and fuel plus freight cost/te increased 5% QoQ owing to poor operating leverage as part of the cost is fixed in nature. However, these costs are down 4% YoY on optimisation of source mix, better supply-chain management, improvement in thermal energy efficiency, reduction in primary rail freight through better planning and rationalisation of secondary freight / warehousing costs. Other expenses/te including employee costs declined 7% both YoY and QoQ on stricter control in discretionary fixed cost, negotiations-led savings, rationalisation of various cost items partly offset by poor operating leverage. PAT fell 41% YoY to Rs2.7bn.

- FCF increased 82% YoY to Rs4.5bn owing to better working capital management (down by Rs3.2bn YoY). ACC has net cash of Rs47bn (19% of MCap) as of Jun'20, which may further increase over CY20E-CY22E even after factoring-in capex of Rs30bn. ACC's 1.1mnte grinding unit at Sindri may go onstream by H1CY21E; while 4.8mnte expansion may be delayed to CY22E owing to Covid'19 pandemics. Valuation at 7.2xCY21E EV/E is attractive, in our view.

Shares of ACC LTD. was last trading in BSE at Rs.1330.05 as compared to the previous close of Rs. 1315.7. The total number of shares traded during the day was 41868 in over 2689 trades.

The stock hit an intraday high of Rs. 1334.65 and intraday low of 1314.9. The net turnover during the day was Rs. 55489531.

Source : Equity Bulls

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