ACC - Marathon champ - ElaraCapital

East is East – capacity expansion to offset volume issues

In CY12, ACC (ACC IN) grew by just 1.6% vs 5.6% for the sector, due to capacity constraints in high growth regions of East and Central India. All this is likely to change. It has recently announced aggressive expansion of 8.5 mn tonnes, 4.0 mn tonnes of which in the eastern region is already underway. In our view, ACC's organic capacity expansions plans are not only the most aggressive among large caps but also in the attractive markets of East and Central India. The eastern region is not only the fastest-growing region but also has the highest potential, due to low per capita cement consumption. Furthermore, most capacities in East India are grinding units, which, in turn, will ensure prices there will remain high.

Synergy equals higher cost savings

Holcim expects synergistic benefits in the range of INR 7.8-9.0bn from restructuring, of which 50% is likely to accrue to ACC. As ACC is the most inefficient company among large caps, it would be easier for Holcim to realize higher cost savings in ACC than in Ambuja Cement. If we assume Holcim is able to capitalize synergy at the lower end of guidance, EBITDA per tonne is expected to increase by INR 160.

Out with the old – new plants to boost efficiency

Historically, ACC profitability has been low because of its older, inefficient plants, leading to higher repair & maintenance cost and consumption norms. The company is planning to gradually scrap its older plant at Jamul in Chhattisgarh. Furthermore, with the new plants coming on stream, the share of new capacity created after CY09 is likely to increase from ~20% to ~38%. This would improve blended EBITDA by INR 50 per tonne.

Margin improvement, better volume to reduce valuation gap

ACC currently trades at a 30% discount at INR 5,400/tonne versus INR 7,600/tonne for peers, due to low profitability & capacity addition in the past few years. With the margin gap likely to decline and capacity additions on track, we expect ACC to post earnings CAGR of ~9% vs ~6% for peers. Thus, with fundamentals improving, we expect the valuation gap between ACC and peers to reduce.

Stock to register CAGR of 19% over the next three years

By valuing ACC at EV/ tonne of INR 7,000 on its CY17E capacity, we arrive at a CY16E TP of INR 1,732, implying 57% potential upside. At the CMP and a dividend yield of 3%, we expect the stock to generate CAGR return of 19%. Our target multiple is at a 13% discount to the existing cost of setting up a Greenfield plant (15% discount to peers) and is equivalent to average discount to replacement cost in the cement downcycle during FY00-05 when ACC had reported losses. However, we retain our one-year TP of INR 1,270 and reiterate Accumulate.

Source : Equity Bulls

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