Analyst Corner: ACC rating – Buy: Management of costs was impressive

On a q-o-q basis, Ebitda dipped ~19% owing to seasonally weak prices and rising fuel cost. (Representational image)

ACC continues to impress with its efficient cost management vis-à-vis peers. In Q3CY21, freight cost/t declined 2.6% q-o-q despite rising diesel cost while ‘other expenses’ stood flat q-o-q amid an overall inflationary trend. Surging fuel prices would impact cost going ahead, but we expect ACC to fare relatively well owing to its high exposure to domestic coal (40–45% in our view). Factoring that in and assuming industry-wide price hikes (to pass on rising fuel cost), we broadly retain our earnings estimates.

ACC would be a prime beneficiary of the expected recovery in demand post-good monsoon. Its current valuation of ~10x CY22e EV/Ebitda is attractive; maintain ‘Buy’ with a TP of Rs 2,696.

Good showing on costs: Q3CY21 Ebitda at Rs 7.1 bn (up 6% y-o-y) is ~3% ahead of our estimate and broadly in line with consensus. On a q-o-q basis, Ebitda dipped ~19% owing to seasonally weak prices and rising fuel cost.

High other operating income helps offset cost impact: While volumes at 6.57MT rose just 1% y-o-y, realisations surprised, falling 1.6% q-o-q versus our estimate of a 2.5% drop. Other Operating Income (OOI) at Rs 956 mn surged 28% q-o-q owing to higher incentive income. Overall, Ebitda/t at Rs 1,083 rose ~5% y-o-y (down ~15% q-o-q).

Outlook: Price hikes on the cards– The current surge in fuel cost is unprecedented and has an industry-wide impact. With demand expected to improve (post-extended monsoon season), we expect the industry to pursue sharp price hikes as well as pass on higher costs to consumers. We continue to value ACC at 13x CY22e EV/Ebitda and maintain ‘BUY/SO’.