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ACC Shares Fall On Rating Downgrade

Kotak Institutional Equities downgraded ACC to ‘reduce’ from ‘add’.



ACC Cement advertisements are pasted on a tram in West Bengal, India. (Photo: Sanjit Das/Bloomberg)
ACC Cement advertisements are pasted on a tram in West Bengal, India. (Photo: Sanjit Das/Bloomberg)

Shares of ACC Ltd. fell after Kotak Institutional Equities downgraded the stock, citing limited potential upside.

The benefits of a strong balance sheet appear well priced in, the brokerage said, as it downgraded the stock to ‘reduce’ from ‘add’. “Renewal of technical know-how fees agreement on previous terms is a relief but a shorter, two-year agreement is not comforting,” Sumangal Nevatia at Kotak Institutional Equities, said in the note. “It has timely commissioned its east grinding unit but slow progress on central India expansion could start restricting growth in 2022.”

The brokerage, however, raised its price target on ACC to Rs 1,875 apiece from Rs 1,800, a potential upside of 5% from Thursday’s closing price.

Kotak Institutional Equities expects ACC to witness a 10% year-on-year decline in overall volumes for 2020. For 2021, it expects 15% growth in volumes, courtesy a low base. “Benefits of operating leverage and further cost efficiencies from the master supply agreement should more than offset raw material cost inflation in 2021,” the note said, adding ACC may report Ebitda per tonne of Rs 984 in 2020 and Rs 1,008 in 2021.

In order to factor in lower volumes due to delay in expansion, the brokerage cut its 2022 Ebitda estimate by 4%. “[But] a robust balance sheet and free cash flow yield should limit the downside.”

Kotak Institutional Equities also expects the technical know-how fees overhang to resurface sooner as the duration of the [royalty] agreement has only been kept for two years compared to previous instances of five years (2013-17) and three years (2018-20).

Shares of ACC fell as much as 3% to Rs 1,731.95 apiece on Friday. The stock is down for the third straight day. Of the 43 analysts tracking the company, 34 have a ‘buy’ rating, six suggest a ‘hold’ and three recommend a ‘sell’. The average of Bloomberg consensus 12-month price targets implies an upside of 6%.