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    Buy ACC, target Rs 1,930: HDFC Securities


    ACC is a largecap company, operating in cement sector.

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    The brokerage has set a one-year horizon for the stock to hit the target price.

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    HDFC Securities has given a buy recommendation on ACC with a target price of Rs 1,930.

    Shares of ACC traded at Rs 1,574.65 around 12:35 pm on 22 July, 2019. The brokerage has set a one-year horizon for the stock to hit the target price.

    June quarter highlights:

    • During Q2CY19, consolidated net sales, Ebitda and adjusted PAT rose 8 per cent, 17 per cent and 22 per cent year-on-year (YoY) to Rs 4,150 crore, 783 crore and 456 crore, respectively.
    • ACC’s volume growth stood flat YoY, impacted by both demand slowdown during the elections and due to a sharp increase in cement price during the quarter (across all markets). Thus, utilization remained flat at 91 per cent YoY.
    • Buoyed by strong realization gains, Q2 unitary Ebitda increased 20 per cent YoY and 62 per cent QoQ to Rs 1,052/MT (highest since June 2012). Its opex marginally increased 3 per cent QoQ (up 5 per cent YoY) driven by 7 per cent increase in unitary fixed costs (less volumes QoQ).
    • Sales volume rose 11 per cent YoY in Q2, however higher cement prices pulled down segmental Ebitda by 35 per cent YoY to Rs 21.2 crore (3 per cent of total Ebitda against 5 per cent YoY).

    Strong near term outlook
    As per the brokerage, while ACC’s volume growth will taper off to sub 5 per cent (absence of surplus capacity), its profitability should expand in CY19/20 led by healthy cement price recovery (despite factoring in QoQ fall in prices in the second half) and moderating fuel costs.

    Investment rationale
    The brokerage estimates ACC to deliver Ebitda and PAT CAGR of 13 per cent and 17 per cent, respectively, during CY18-20E.

    Given ACC’s healthy cash flow and RoE, and its firming up major expansion plans (20 per cent capacity increase by end CY21E/early CY21E), current valuation (of 9.3 times/8.8 times its CY20/21E Ebitda, EV/T of $120) is inexpensive.

    "We reiterate buy with a target price of Rs 1,930 (ascribing 11 times to its Jun-21E Ebitda and 0.5 times to its CY20E CWIP)," said the brokerage.

    Sharp roll back in cement prices and a rebound in crude-led energy costs are the risks for the stock, the brokerage added.
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