The company’s continued drive towards premium products – 19% of total volumes in CY18 and targeted to reach 30% over the next few years – as well as expected savings (3% of PBT) from the master supply agreement (MSA) with parent Ambuja Cement from CY20 bode well for margins.
Our recent interaction with ACC indicates potential cost benefits would accrue to the company in the wake of declining pet coke prices and increased availability of linkage coal. Management’s focus on completing the 5.9-mtpa cement (3-mtpa clinker) expansion by Q3CY21 offers much-needed volume growth visibility (albeit from CY22 onwards). The company’s continued drive towards premium products – 19% of total volumes in CY18 and targeted to reach 30% over the next few years – as well as expected savings (3% of PBT) from the master supply agreement (MSA) with parent Ambuja Cement from CY20 bode well for margins. With the company likely to be one of the prime beneficiaries of our positive sector hypothesis (of stable demand over medium term, rising industry clinker utilisation and benign fuel cost), we maintain Buy rating on the stock with a TP of Rs 1,846 (at 12x CY20e EV/Ebitda).
Cost relief on the cards
Due to lack of domestic coal availability, ACC’s fuel cost/t remained elevated despite global fuel prices (e.g. pet coke and imported coal) spiralling down. However, with increased availability of linkage coal and a further dip in global fuel rates, energy cost is expected to trend down over the ensuing quarters. Besides, the MSA with Ambuja Cement would yield synergies from CY20 onwards.
Capex: Timely completion holds key
The 5.9-mtpa cement and 3-mtpa clinker expansion is a key focus area for ACC. The company’s endeavour is to commission the project by Q3CY21, which will drive robust volume growth in CY22. The bulk of its new cement capacity coming up in the lucrative central region (4.8 mtpa) is promising. The capacity expansion also provides much-needed volume growth visibility, which would be a key trigger for the stock.
Outlook: Sector tailwinds intact
We expect pan-India player ACC to be a prime beneficiary of the positive industry fundamentals . We continue to value the stock at 12x CY20e EV/Ebitda and maintain ‘BUY/SP’. The stock is trading at 9.4x CY20e EV/Ebitda.