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Buy ACC, target Rs 2,040: Motilal Oswal Financial Services

ACC is a largecap company, operating in cement sector.|
Updated: Jul 19, 2019, 12.59 PM IST
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The brokerage has set a one-year horizon for the stock to hit the target price.
Motilal Oswal Financial Services has given a buy recommendation on ACC with a target price of Rs 2,040.

Shares of ACC traded at Rs 1,590 around 12:40 pm on 19 July, 2019. The brokerage has set a one-year horizon for the stock to hit the target price.

Investment rationale by the brokerage:

Volumes down marginally but realizations improve
Volumes declined 0.6 per cent year-on-year (YoY) to 7.2mt in Q2CY19. However, premium product volumes were up 9 per cent YoY.

Cement realizations increased 8 per cent YoY (up 12 per cent QoQ) to Rs 5,255, led by healthy price hikes in the quarter.

Revenue grew 8 per cent YoY to Rs 4,150 crore against the brokerage's estimate of Rs 3,710 crore, led by optimization of both market and product mix.

Profitability improves 18 per cent YoY
Blended cost/t increased 6 per cent YoY (up 4 per cent QoQ) to Rs 4,678. However, blended EBITDA/t was up 18 per cent YoY (up 53 per cent QoQ) to Rs 1,086 due to healthy realizations.

Consequently, EBITDA increased 17 per cent YoY (up 47 per cent QoQ) to Rs 780 crore against the brokerage's estimate of Rs 580 crore.

Operating margin came in at 18.8 per cent (up 1.50pp YoY, up 5.30pp QoQ). Adjsuted PAT increased 22 per cent YoY to Rs 450 crore against the brokerage's estimate of Rs 340 crore.

Key takeaways from management presentation
Ready-mix concrete volumes were up 11 per cent YoY. Power & fuel cost/t increased 9 per cent YoY due to higher premium on e-auction coal and increased pet coke/imported coal prices.

The company has enhanced the use of alternative fuels.

Freight cost/t increase was restricted to 1 per cent YoY due to road freight reduction and logistics operating efficiency improvement.

Valuation view
ACC plans to add capacity of 6mt at total capex of Rs 3,000 crore (about $71/t), which will come on stream by CY21.

Capex will be funded by internal accruals and help the company to protect its market share in the central and eastern regions.

The profitability gap between ACC and its peers has narrowed significantly, led by a higher proportion of premium sales and sales from its new cost-efficient units at Jamul and Sindri.

"We increase our EBITDA/PAT estimate by 16 per cent/10 per cent for CY19 and by 13 per cent/8 per cent for CY20 to factor in higher realizations," said the brokerage. The stock trades at 7.4 times CY20E EV/EBITDA.

"We value the stock at 10 times Jun’21E EV/EBITDA (30 per cent discount to UTCEM) and arrive at a target price of Rs 2,040 (implied EV/tonne of $125 on CY20)," the brokerage added.
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Disclaimer: This recommendation is analyst's own and does not represent those of & Please consult your financial advisor before taking any position in the stock/s mentioned.

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