Significant increase in capital cost, but sector fundamentals intact
Not only did ACC participate in the Motilal Oswal 8th Annual Global Investor Conference,
CEO & MD, Mr Kuldeep Kaura also presented at the CEO Track. Key takeaways:
Demand outlook for the cement sector remains positive, with volumes likely to
grow at a CAGR of 8-9% against ~7% GDP growth over the next 10 years.
ACC is focusing on maintaining its 11% market share and attaining cost leadership in
a high cost (capex & opex) environment.
Given the increase in capex cost, the industry would require higher profitability to
earn reasonable RoCE. Hence, the company sees limited downside to current pricing.
Given its pan-India presence and strong brand equity, ACC is one of the best proxies
on the Indian Cement industry. However, we maintain Neutral, as valuations are fair
Industry insights
Industry volumes are likely to grow at a CAGR of 8-9% to 470mt by 2020,
driven by strong housing growth and increase in infrastructure spends. Per
capita consumption is very low at 185kg as against 1,390kg in China, and should
increase considerably, going forward.
Industry utilization is likely to improve from the current ~76% to 80% by CY15
and 84% by CY16.
There has been significant increase in both capital cost and operating cost
over the last few years, along with significant increase in the gestation period.
ACC expects greenfield capacity to take ~5 years and cost ~INR7,500/ton
(~USD140/ton), excluding captive power.
Company vision and strategy
ACC aims to maintain its market share at ~11%, effectively resulting in 55mt
dispatches by 2020.
It intends to attain cost leadership by improving critical operating parameters
from the industry average to industry leading levels. It is focusing on (a)
increasing blending, (b) enhancing energy efficiencies, (c) increasing CPP
PLF, and (d) improving logistics efficiencies.
ACC does not expect to make any royalty payments. It pays for services availed
from Holcim, and unlike other countries where Holcim has similar tie-ups,
ACC does not use the Holcim brand in India.
Management meeting takeaways
MP coal blocks not part of CAG report; to be commissioned in two years: Of
the four coal blocks in Madhya Pradesh (MP) in JV with the state government,
work on one block is progressing well, with expected commissioning in two
years (producible capacity of 1.2-1.3mt/annum). The said coal block has ~30mt
of mineable reserves. None of its coal blocks are implicated by CAG.
Limited downside risks to pricing: Given the increase in capex cost, the industry
would require higher profitability to earn reasonable RoCE. Hence, ACC sees
limited downside to current pricing.
Rising focus on alternate fuel: ACC is focusing on increasing use of alternate fuel
to mitigate the impact of shrinking linkage coal. It expects to replace 15-20% of
coal with alternate fuels.
Brownfield capacity expansion by 1QCY15: ACC is setting up a brownfield capacity
of 5mt at Jamul (Chattisgarh), including split grinding units at Sindri and West
Bengal, which is expected to be operational by 1QCY15. Upon commissioning of
this capacity, the company intends to gradually phase out the ~1.5mt old plant at
Jamul. It is yet to place orders for plant and machinery. At expanded capacity, 70%
power requirement will be addressed by the existing CPP. However, obtaining
the balance power will be a challenge, given that Chhattisgarh is a power-deficit
state.
Valuation and view
Pan-India presence and very strong brand equity makes ACC one of the best proxies
on the Indian Cement industry.
However, given its highest dependence on domestic linkage coal (over 50%), ACC
would be worst impacted due to reduction in availability of linkage coal. Allotment
of coal blocks in MP (in a JV with the state) and West Bengal (in a consortium)
offers option value.
Valuations at 15.3x CY13E EPS, and an EV of 8.4x CY13E EBITDA and USD126/ton, are
a fair reflection of the business fundamentals. Maintain Neutral, with a target
price of INR1,420 (EV of ~9x CY13E EBITDA).
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