ACC Share price: Nomura puts stock under spotlight - Here is what investors need to know

ACC Share price: Nomura hosted ACC's management at Nomura’s Investment Forum 2020 on 1-2 December, 2020. Management highlighted that cement demand remains robust so far and cement prices have been resilient. Management expects higher cement realizations to offset the increase in fuel / freight costs while higher production is expected to offset the increase in fixed costs.

Key takeaways:

Demand trends:

The pick-up in cement demand after COVID-19 relaxations has been stronger than expectations. During Apr-Sep, cement demand was driven by the strong growth from rural India on the back of higher government spending. ACC’s management indicated that cement demand recovery has further accelerated in Oct-Nov with the pickup in demand from urban and infrastructure segments. While rural demand has normalized from the recent hyper growth phase, pent-up demand from urban areas and infrastructure projects are the key demand drivers now. ACC Management also noted that real estate inventory with large developers is reducing with the declines in prices, stamp duty benefits, etc. and developers are now completing unfinished projects. However, there have been few new launches and demand from the commercial segment could still take some time to recover to pre-COVID levels according to ACC. Management expects industry demand to grow 6-7% in CY21 and expects ACC to maintain stable market share.

Pricing trends:

Current cement prices are higher than Sep-20 exit prices. Cement prices have been resilient in most regions. However, with intense competition and over-supply, prices in East India have been weaker.

Costs:

ACC Management expects variable costs to increase sequentially driven by higher petcoke and diesel prices. Further, they expect some of the fixed cost savings to also reverse with the normalization of operations and increased advertisement spends.

Cost-saving measures:

Under Project Parbat, ACC had set a target of reducing total costs by 5%. The company undertook several cost-saving projects like renegotiation of warehouse rents, increased direct dispatches from 40% to 60% of sales, and optimized fuel / freight mix. The company expects cost-saving efforts to continue going ahead.

Margins:

ACC Management expects higher cement prices to offset the increase in input costs (energy and freight) while higher production is expected to offset the increase in fixed costs.

Expansion plans:

The 1.4mt grinding unit at Sindri is expected to commission by Mar-21. ACC took a pause on Ametha cluster (3 mt clinker and 4.8mt grinding units over three locations in Uttar Pradesh and Madhya Pradesh) due to COVID-19 outbreak. Land, limestone, etc. are in place for the Ametha cluster project and with robust cement demand, management expects board approval for recommencement of the project soon. ACC Management expects the commissioning of Ametha cluster by end-CY22 (expects 18-20 months from board approval).

Waste Heat Recovery System (WHRS):

ACC management expects to commission a 25 MW WHRS plant by end-CY21. WHRS plant will cost Rs 2.5-3 bn and management expects annual cost savings to the tune of Rs 20 mn per megawatt (MW) from WHRS plants.

Capex:

The Ametha cluster project will cost Rs 27 bn, with 60% of costs to be incurred in CY21 and the rest in CY22. Apart from the capex for WHRS plants, annual maintenance capex would be around Rs 3.5 bn.

Expect higher realizations, cost saving measures to offset cost inflation:

Nomura expects cement demand to remain robust with good monsoons, decreasing COVID-19 caseloads in urban India, and the government’s continued focus on rural and affordable housing, revival of infrastructure projects with improving labor availability post-festive period. With sharp demand recovery, they expect 11% yoy decline in 2020F followed by 13%/4% yoy growth in CY21F/22F for ACC. While variable costs (e.g., power, fuel and freight) are likely to increase sequentially, we expect fixed costs to remain benign. With higher cement realizations, several cost rationalization measures in place and higher operating leverage, we expect ACC’s blended EBITDA/t margins to sustain Rs 980/t (vs INR 810/t in CY19).

ACC share price - Valuation methodology:

Nomura uses 9x Sep-22F core EBITDA to arrive at a target price of Rs 1710 (implying 1% downside). The stock currently trades at 20.4x CY21F P/E and 9x CY21F EBITDA. They maintain our Neutral rating on ACC. UltraTech Cement is their preferred pick in the cement space.

Key upside risks:

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Higher volume growth, higher than expected cement prices and a sharper decrease in operating costs are some key positives.

Key downside risks:

Weaker ACC volume growth, lower than expected cement prices and sharp increase in operating costs could be some key negatives for the stock.