Adani's Cement Stock Seen To Rally By 25-36% Ahead After Firm Sways Back To Profits In Q2; Do You Own?

Adani Group-backed cement company, ACC Ltd has swayed back to earning profits at Rs 388 crore in the September quarter of FY24, after a loss of Rs 87 crore in Q2 of previous fiscal. The company has reported healthy growth on a year-on-year basis across key parameters, which has made brokerages optimistic about the company and hence they have recommended buying ACC shares. This Adani stock which was seen to have lesser impact on Hindenburg report since January among other group's stocks, is seen to rise between 25-36% ahead.

In Q2FY24, ACC earned a net profit of Rs 388 crore versus a net loss of Rs 87 crore a year ago same quarter. While net revenue climbed to Rs 4,435 crore as against Rs 3,987 crore in Q2FY23. Also, EBITDA rose multi-fold to Rs 759 crore in Q2FY24 as against Rs 86 crore in Q2FY23, while EBITDA margins mind-bogglingly expanded to 16.3% as of September 30, 2023, compared to 2.1% as of September 30, 2022. Sales volumes stood at 8.1 million tonnes in Q2 of the current fiscal versus 6.9 MT in Q2FY23.

While announcing Q2 results, Ajay Kapur, Whole Time Director & CEO, of ACC Limited said, "We are committed to reducing our carbon footprint and it remains at the forefront of our mission. In H1 FY'24, we have reduced Specific CO2 emissions by 13 kg/T of cementitious material to 466 kg/T of cementitious material YoY. Our strategies include optimising our industry-leading green blended cement portfolio @ 93% of total sales, minimizing thermal and electrical energy intensity, introduction of Waste Heat Recovery Systems across facilities, and a significant focus on boosting our renewable energy capacity and usage."

He added, "I firmly believe that our competitive advantage will create a path for sustained profitability within the industry. As we chart our course towards upcoming growth milestones, our strategic preparedness reaffirms our readiness to achieve promising results in the coming quarters".

However, after the Q2 earnings, ACC share price ended at Rs 1878.15 apiece, down by 1.20% on BSE with a m-cap of Rs 35,269.26 crore. Notably, this also gives a buy-on-dips opportunity in ACC shares. Here's why!

According to Centrum's report, ACC's long pending capacity in Central India (Ametha, MP) finally got commissioned in 2QFY24, providing 3.3mn mt of clinker capacity. Given the already higher capacity utilization, this capex will provide much needed volume growth in near future. However, next set of capex from the Adani group is planned in Ambuja so longer term volume visibility is still bleak. The company also commissioned WHRS capacity of 22.4MW at Kymore and Jamul. 16.3 MW WHRS capacity at Ametha is expected to come up by 3QFY24.

Centrum's note added further "ACC reported improvement in cash balance to Rs36.3bn as on 2QFY24. There has been significant reduction in other current assets from Rs22.6bn to Rs13.6bn. other current assets included advance of Rs 9.75bn given to coal trader for supply of coal. We believe that substantial part of this advance has been reversed. However, there has been substantial increase in trade receivables from Rs8.74bn to Rs14.8bn which has offset the impact of reduction in other current assets. Capex stood at Rs6bn and other current financial assets at Rs 33.3bn."

Thereby, on the valuation, Centrum's note said, "ACC stock is current trading at 8.5x FY25 EV/EBITDA which we believe is undemanding given the group's commitment to reduce the cost and improve EBITDA/mt of cement operations. We will review and update our estimates post conference call. We currently have Buy rating on the stock with TP of Rs2,554." From the current price level, the target price would mean nearly 36% upside in ACC shares ahead.

Meanwhile, Emkay Global's note said, "Blended realization declined 5% YoY/1% QoQ to Rs.5,466/ton (Emkay est: Rs5,603), likely on change in the market mix and volumes push to gain market share. We increase our EBITDA estimates upwards by ~5% in FY24E, citing recent price hikes and broadly maintain FY25-26E. Given the healthy balance sheet and attractive valuation, we maintain BUY with a revised Sep-24E TP of Rs2,365 (12x EV/E), post the quarterly roll over."

Emkay's target price would mean over 25% potential upside in ACC shares.

Adani Group holds a 63.19% stake in Ambuja Cement which directly owns a 50.05% stake in ACC shares. Adani also owns another 4.48% stake in ACC through Holderind Investments as of September 30, 2023.

Disclaimer:

The recommendations made above are by market analysts and are not advised by either the author or Greynium Information Technologies. The author, the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.