ACC's Q2CY18 results (Upgrade to Outperformer) - Robust realizations offset cost pressures

Q2CY18 result highlights

• PAT +15% yoy to Rs3.7bn:on higher realizations (strong beat vs estimates) and volumes. Reported PAT +1% yoy to Rs3.3bn on Rs440m employee separation cost.
• Volume growth at 7.4% yoy to 7.24mt: led by double digit volume growth in East as also robust growth in other regions.
• Higher share of East & premium product volumes aid realisations: Adj. for Rs3.2bn RMC revenues (+17.4% yoy), realisations were up 5.6% yoy to Rs4761/t. On a qoq basis, realizations were up Rs225/t despite weak cement prices, due to higher volumes from East (double digit growth) where prices were better as well as robust growth in premium and value added products (+44% yoy). Our channel checks suggest cement price hikes in Jun-18, notably North & Central, should support realizations going forward. Overall, revenues +13.7% yoy to Rs37.7bn.
• Higher freight, RM costs drive higher costs (+5% yoy): Freight cost/t increased 10% yoy due to rise in diesel prices and change in commercial terms partly offset by 2% reduction in leads. RM cost/t increased 21.5% yoy due to steep increase in prices of slag and flyash.  P&F cost/t increase was restricted to 2% yoy (-1.5% qoq) despite rise in petcoke prices and limited linkage coal availability led by efficiency improvements, higher blending and higher usage of alternative fuels.
• Blended EBITDA/t at Rs811 (+10%yoy; +Rs216 qoq): led by higher realizations. Hence, EBITDA increased 19% yoy to Rs5.87bn. 

Key positives: Robust realizations, decline in P&F costs qoq

Key negatives: Higher freight costs

Impact on financials: Upgrade CY18/19E EPS by 13%/3% to Rs60.7/Rs77.8

Valuations & view

ACC’s performance has improved over the past few quarters led by the commissioning of efficient Jamul capacity (2.5mtpa cement capacity) and focus of group to grow volumes. Accordingly, the higher utilisation levels (positive operating leverage) and blending (higher use of slag) coupled with strong growth in premium products is enhancing profitability. Moreover, cost savings are likely to accrue as the operational synergies is realised between ACC & Ambuja as per Master Supply Agreement (3-5% PBT savings). Accordingly, we estimate 29% earnings CAGR over CY17-19E. Moreover, with a 25%+ correction over the past 6 months, we believe valuations of 8.8x CY19E EV/EBITDA and US$93 on EV/tonne are attractive. Upgrade to Outperformer.