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ACC - Barring fuel cost impact, efficiency measures under project 'Parvat' visible

ICICI Securities 10 Feb 2022

What's Buzzing:

In the backdrop of rising fuel prices, efficiency measures under project 'Parvat' have enabled ACC to alleviate cost inflation, to some extent. This has also led to narrowing of cost differentials between the company and its large competitors.

Context:

During Q4CY21, the company's sales volume improved sequentially by 14% to 7.49 MT while it was down 2.9% YoY. The 6% YoY increase in cost of production is mainly attributable to higher power & fuel expenses that were up 29% YoY while lower employee, freight & other costs helped to alleviate the impact of higher fuel cost partially. The company reported EBITDA/t of Rs 743/t that was on expected lines.

Our Perspective:

The result of various cost initiatives taken under “project Parvat” to bring down costs through rationalising fixed costs, increasing green energy share and freight cost optimization via master supply agreement with Ambuja has been visible on the company’s overall performance during Q4CY21 as well. However, we need to watch these measures for a couple of quarters for its sustainability. The production cost gap between the company and other large players has now narrowed down to ~9% vs. ~15% earlier. In terms of growth, the company’s capacity expansion projects at Ametha (clinker 2.7 MT and cement grinding 1.0 MT) in MP and split cement grinding unit (3.8 MT) in UP are on track, which are funded via internal accruals. We believe these new capacities would easily get absorbed in the market considering the robust demand outlook backed by strong infra pipeline through higher budgetary support, pick-up in urban real estate and healthy rural demand backed by good Rabi crop season. Given the improving cost efficiencies coupled with new capacity additions of 4.8 MT (or 14% of its current capacity) after long wait period, we expect the valuation gap between the company and other large efficient players to narrow down over the next two years.

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