Buy ACC; target of Rs 1760: ICICI Direct

ICICI Direct's research report on ACC

Over the past few years, ACC reported subdued volume growth (2.1% CAGR in CY10-15) led by a poor macro environment and absence of new capacity addition. However, going forward, we expect cement demand to improve on the back of healthy monsoon, Seventh Pay Commission and strong infrastructure push by the government. Consequently, cement demand is expected to reach 305 MT by FY18E (i.e. at CAGR of 7.5%) vs. (3.5% CAGR in last five years). Apart from improving macro demand, the company is also expanding its capacity in the eastern region by 5 MT. Considering this, we expect the company to report growth in volumes (6.8% CAGR in CY16-17E) in the coming few years.

Cement demand is expected to increase at 7.5% CAGR in the next few years mainly led by healthy monsoons, Seventh Pay Commission and infrastructure push by the government. ACC being a pan-India player is expected to be a key beneficiary of this improvement in demand. Further, capacity expansion of 5 MT (i.e. 16% of capacity) is expected to result in 7.1% CAGR in revenues in CY15-18E. Further, cost control initiatives like higher share of pet coke, better sales mix and reduction of employees will help the company in margin expansion, going forward. We expect the OPM to improve from 10.3% to 13.7%in CY17E. Further, ACC is trading at an EV/tonne of $130 below the replacement cost of $150. Hence, we maintain our BUY rating with a revised target price of Rs 1,760/share (i.e. valuing the stock at CY17E EV/tonne of $150/tonne on CY17E capacity of 35 MT).