Buy ACC; target of Rs 1380: ICICI Direct

ICICI Direct's research report on ACC

ACC surprised positively in Q1CY20, beating our estimates on all fronts. Revenues fell 10.8% YoY to Rs 3,433 crore (vs. I-direct estimate of Rs 3,331 crore) led by a decline in cement volumes as the industry saw weak offtake in the quarter. Cement volumes for the quarter were at 6.56 MT (vs. I-direct estimate: 6.4 MT), down 12.1% YoY while RMC volumes fell marginally from 0.94 cum in Q1CY19 to 0.93 cum in Q1CY20. Blended realisations were at Rs 5,233/t, up 1.4% YoY (in line with I-direct estimate of Rs 5,225/t). ACC saw healthy EBITDA growth on the back of improvement in profitability. EBITDA/t for the quarter was at Rs 789/tonne (vs. I-direct estimate: Rs 706/tonne), up 27.4% YoY. Thus, despite a steep drop in volumes, the EBITDA increased 12% YoY to Rs 518 crore (vs. I-direct estimate: Rs 450 crore) while EBITDA margins expanded 308 bps YoY to 15.1% The growth in operating performance is not reflected in PAT owing to steeply lower other income YoY, as the base quarter included a one-off to the tune of Rs 99 crore. PAT declined 6.6% YoY to Rs 323 crore (vs. I-direct estimate: Rs 304 crore).

Outlook

While ACC would face challenges on the P&L front in the near term, it is one of the few companies with no debt on its books and is expected to remain net cash positive despite capital expenditure on capacity addition. Return ratios are also expected to stay healthy despite a reduction in profitability. The recent correction puts ACC in a comfortable position on the valuation front. Thus, we maintain BUY on ACC, valuing the company at 12x CY21E EV/EBITDA to arrive at a target price of Rs 1,380 (implying an EV/t of ~$80).

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