We believe improvement in ACC’s earnings will be constrained by (i) its large capacities in proximity to the south (close to 40%), a region with sub-60% utilisation; (2) rising cost pressures amid a high cost structure; and (3) capacity constraints, as we expect plant operating rates to increase to +90% in the next 2-3 years. We cut our TP to Rs 1,205 (Rs 1,300 earlier) and maintain sell on expensive valuations — stock trades at 13X CY2019E Ebitda and 24X earnings. In contrast to expectations of strong earnings growth at the start of the each year, ACC’s Ebitda/tonne has improved at CAGR of only 4% between CY2014-2017 to Rs 593/tonne (from Rs 508/tonne in CY2014). We expect Ebitda/ton for CY2018E to be flat as well (at Rs 594/tonne) due to rising cost pressures and weak prices trends. The company’s 40% of capacity in south, west regions will restrict earnings improvement due to large overcapacity in the region (sub-60%). Moreover, the all-India capacity addition of 75 mtpa over the next three years will restrict industry utilisation rates to close to 70% (from 64% now). The higher profitability earned by cement companies in last up-cycle (2007-2010) was led by industry operating at >80% utilisation rates.cut in EV/Ebitda multiple reflects the rising cost of equity as well as the fact that ACC’s plant utilisation rates will increase to +90% in three years (and which are already built into our earnings estimates and TP).
Post CY2020E, ACC’s volume growth will largely be a function of investments in new capacities. A new cement project earns an investment return of 8-10% (assuming Industry utilisation of close to 75%). We don’t see merit in ascribing a higher multiple to the stock now to value such expected investments given returns from such a project will not be materially higher than the cost of equity. We believe barriers to entry in the cement industry are still not as high as reflected in spite of capacity additions by extant and new companies.
