9 October 2013
Update | Sector: Cement
ACC
BSE Sensex
19,984
S&P CNX
5,928
CMP: INR1,127
TP: INR1,313
Upgrade to Buy
Synergy benefits to drive profitability
Superior EPS CAGR, uptick in RoE make stock ripe for re-rating
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
ACC IN
187.7
1,515/912
13/-11/-28
211.8
3.4
Better synergy play without issue of hold-co discount and with stronger B/S
Clarity on growth plan should address inventors’ concern and enrich market mix
Potential creeping acquisition to support stock price
Synergies to narrow profitability gap; EPS growth to be higher than peers
Upgrade to Buy with TP of INR1,313 (CY14E EV of USD100/ton), 16% upside
Better vehicle to play synergy benefits
Financial Snapshot (INR b)
Y/E DEC
2012 2013E 2014E
Sales
111.3 110.4 122.9
EBITDA
NP
Adj. EPS
(INR) (%)
EPS Gr.
BV/Sh (INR)
RoE (%)
RoCE (%)
Payout (%)
Valuations
P/E (x)
P/BV (x)
EV/EBITDA
( )
EV/Ton (x)
16.4
2.9
9.0
94
20.2
2.5
10.5
88
17.2
2.3
8.3
82
19.7
12.9
68.7
14.1
393
17.7
23.5
61.8
15.8
10.5
55.8
-18.8
455
13.1
17.5
61.1
18.6
12.3
65.5
17.4
480
14.0
18.9
62.1
Acquisition of ACC by ACEM would drive synergies of ~INR4.5b each to be
realized over 2-3 years, driving 5%/10%/16% EPS accretion for ACC in
CY14/15/16. We believe ACC is a better vehicle to play these synergies, without
issues of cash outflow (for acquisition) or hold-co discount.
Clarity on growth plans – to add 8m tons in Central and East India
Post the announcement of ACC’s acquisition by ACEM, Holcim clarified that of
its total capacity addition of ~14m tons planned for India, ~8m tons would be in
ACC. While these plans would fructify over CY15-18, they would strengthen the
geography mix of ACC’s capacities – the contribution of Central and East India
would increase from ~37% in CY13 to ~50% by CY17/CY18.
Creeping acquisition potential to support stock price
Potential creeping acquisition by ACEM to re-align Holcim’s economic interest
in both the companies would support stock price. It intends to acquire up to
10% stake over 24 months and in-principle approval of ACEM’s Board is in place
for a maximum amount of INR30b (implies 40% premium to ACC’s CMP).
Shareholding Pattern (%)
As on
Promoter
Dom. Inst
Foreign
Others
Jun-13 Mar-13 Jun-12
50.6
10.2
32.0
7.3
50.6
8.6
33.5
7.4
50.2
12.4
29.9
7.5
Profitability gap to narrow, EPS CAGR to be higher than peers
Synergy-led narrowing of profitability gap (from ~INR260/ton in CY13 to
~INR114/ton by CY16), superior earnings growth (29% CAGR over CY13-16 v/s
17-19% for its large peers), improvement in capital efficiency (by 3-4pp by CY16)
and strongest balance sheet among peers makes ACC ripe for re-rating.
Dividend payout would remain healthy, as it would be welcomed by parent
(ACEM) to support its cash outgo commitments.
Stock Performance (1-year)
Valuing at CY14E EV of USD100/ton; upgrade to Buy
We are yet to formally incorporate benefits of synergies. However, based on
our ballpark estimates, the stock trades at 16.6x CY14E EPS, and at an EV of 8x
CY14E EBITDA and USD83/ton. As the full benefits of synergies would percolate
only after CY15, we shift to asset-based valuation for ACC and upgrade to
Buy,
with a target price of INR1,313 (EV of 9.75x CY14E EBITDA and ~USD100/ton).
Jinesh Gandhi
(Jinesh@MotilalOswal.com); +91 22 3982 5416
Sandipan Pal
(Sandipan.Pal@MotilalOswal.com); +91 22 3982 5436
Investors are advised to refer through disclosures made at the end of the Research Report.

ACC
Better vehicle to play synergy benefits…
Assuming 20%/50%/100%
of total INR4b-4.5b synergy
benefits to be attributable
over CY14/15/16, we
estimate 5%/10%/16% EPS
accretion for ACC
Both ACC and ACEM expect to derive meaningful synergy benefits quantified at
INR7.8b-9b, likely to be achieved in two years post restructuring. The synergy
benefits are almost equally attributable to ACC and ACEM.
Assuming 20%/50%/100% of total INR4b-4.5b synergy benefits to be
attributable over CY14/15/16, we estimate 5%/10%/16% EPS accretion for ACC.
In the event of higher realizations due to better pricing power, EPS accretion
would be even more attractive. We estimate INR5/bag of higher price in
addition to our base case assumption of INR10/bag in CY14, which would lead to
EPS accretion of 20%/22%/27% over CY14/15/16.
Unlike ACEM, ACC would not have any cash outgo, and have greater balance
sheet strength. Also, unlike ACEM, ACC does not have any perception issue
regarding holding company (hold-co) discount.
ACC would benefit more from synergies and potential pricing power
Current Estimates
CY13E
CY14E
EBITDA/ton (INR)
656
728
EPS (INR)
56
66
Synergy benefits: Base case*
EBITDA/ton (INR) with synergy *
656
764
Change in EBITDA/ton (INR)
35
EPS with synergy (INR)
69
EPS accretion (%)
5
Fair value (INR/Sh)
1,313
Pricing power: Base case +INR10/bag price in CY14/CY15/CY16
Price higher by INR5/bag v/s est
EBITDA/ton (INR)
656
864
EPS with synergy & higher realn (INR)
79
EPS accretion (%)
20
Fair value (INR/Sh)
1,313
CY15E
854
84
935
82
93
10
1,484
CY16E
975
102
1,126
151
119
17
1,900
1,035
103
22
1,616
1,226
130
28
2,043
ACC would witness bridging of profitability gap vis-à-vis peers, led by synergy benefits
(EBITDA/ton)
Levers to improve
profitability would reduce
gap with large cap peers
9 October 2013
2

ACC
INR7.8b-9b of synergy
benefits would require
2-3 years to percolate and
would be equally
distributed between
ACC and ACEM
…arising from cement/clinker swaps and fixed cost reduction
Scope of fixed cost
reduction hinges on
standardization, improving
efficiencies, sharing back-
end, and power of negation
on procurements
Overall indicative benefits of INR7.8b-9b (ACC, ACEM combined) include: (1)
INR3.5b-4b from supply chain optimization, and (2) INR4.5b-5b from reduction
in fixed / procurement costs (benefit from economies of scale in procurement,
improvement in efficiencies, and common utility of back-end services).
Supply chain optimization would be targeted through five layers of synergies: (1)
lead distance reduction, (2) cement/clinker swaps, (3) optimization of
production from lowest cost kilns, (4) shared assets at hubs, and (5) servicing
high contribution areas by lowest cost plant.
Cement/clinker swaps are key to optimization of supply chain and include the
following swaps based on initial assessment:
-
Clinker swaps (two ACC plants supply clinker to two ACEM units, and two
ACEM plants supply to four ACC units).
-
Cement swaps (13 ACEM plants supply in parts of 21 states for ACC, and 10
ACC plants supply in parts of 16 states for ACEM).
The management expects these initiatives to percolate into reduction of lead
distance by 70-80km on 60% of the capacity (i.e. blended 45-50km on full
capacity), which we estimate to be equivalent of ~INR2b logistics cost savings.
Material swaps could (a) curb the regional capacity constraints of ACC and
ACEM by compensating through each other’s unutilized capacity, and (b)
increase the overall market reach and dispatch volume by releasing supply from
capacities in proximity (refer illustrative example below).
The management expects the benefits of supply chain optimization to percolate
sooner than fixed cost optimization, which may take 2-3 years. We have
factored in 20%/50%/100% benefits of targeted synergies in CY14/15/16.
Combined market share should offer better command on pricing, as currently
both companies compete at market level. Additionally, as each one’s market
reach increases due to presence of complementary capacities of the other
(grinding units, terminal, etc), we expect an overall improvement in market mix
towards better pricing zones. Nonetheless, the management expects savings on
fixed cost to take time.
Restructuring opens up scope for synergy benefits of INR7.8b-9b (ACC, ACEM combined)
Source: Company, MOSL
9 October 2013
3

ACC
Fixed cost synergies focused on improving efficiencies and
driving economies of scale
Fixed cost synergies focused on improving efficiencies and
driving economies of scale
Source: Company, MOSL
Source: Company, MOSL
Management aspiration to enhance operating efficiencies in line with best practices
Aspiration to enhance
operating efficiencies in line
with best practices aids
further levers to augment
profitability
Source: Company, MOSL
Capacity map of ACEM and ACC: Various location advantages
9 October 2013
4

ACC
Dadri grinding (ACEM) would get clinker supply from Lakheri Western MP market would be catered better by Lakheri (ACC)
plant (ACC) instead of Rabriyawas (ACEM).
than Rabriyawas (ACEM), freeing up capacity for the North.
Dadri (ACEM) would free up Tikaria (ACC) capacity to focus
more on East UP and Bihar, and Chaibasa (ACC) would focus
more on West Bengal market at lower lead distance. This
should free up ACEM’s WB capacity to supply to Assam and
other North East states, and thus, enhance market reach.
Farraka and Sankrail grinding (ACEM) would get clinker from
Chaibasa and Bargarh (ACC) rather than from Bhatpara
(ACEM). Current cement supply from Chaibasa (ACC) to North
East could be done through Farraka grinding (ACEM), helping
to achieve savings on cement transportation cost.
Ambujanagar plant (ACEM) supplies cement to its Cochin Maratha plant (ACEM) may go for cement swap with Wadi
terminal and upcoming Mangalore terminal, which could be plant (ACC) to cater to West Maharashtra, and in turn focus
serviced by TN/Karnataka plants of ACC.
more on catering to East and Central Maharashtra.
Red dotted line (
):
Existing arrangement for clinker/cement supply
Blue line (
):
Potential arrangement for clinker/cement supply to reduce lead distance
9 October 2013
Source: MOSL
5

ACC
Clarity on growth plans – to add 8m tons in Central and East India
Clarity on growth plan
should address inventors’
concern and enrich
Market mix
Post the announcement of ACC’s acquisition by ACEM, Holcim elaborated on its
capacity addition pipeline for India. Of its total capacity addition of ~14m tons
planned for India over the next few years, ~8m tons would be in ACC.
Post consolidation of Holcim’s India exposure through ACEM, investors were
concerned that ACEM would be its preferred growth vehicle in India. This clarity
of future expansion pipeline should help address investors’ concerns.
Further, the entire 8m tons of capacity addition planned for ACC is in the
structurally sound markets of Central and East India. 3.6m tons would be added
at Jamul (CTG), 1.5m tons at Tikaria (UP), and 3m tons at Ametha (UP).
Currently, only the Jamul plant is being executed, with commissioning expected
by the end of CY15.
This should help improve the geography mix of ACC’s capacities, with share of
Central and East India improving to ~50% by CY17/18 (~43% by CY15 v/s ~37% in
CY13).
Separately, ACC’s efficiency would also improve due to increasing share of new
capacities. For instance, we expect the Jamul plant’s (~15% of total capacity)
profitability to be higher by INR150-200/ton against average EBITDA/ton (INR25-
30/ton on blended EBITDA/ton).
Structurally strong markets of Central and East India would constitute ~50% of ACC’s capacity mix
Source: Company, MOSL
Commencement of two of
its captive coal blocks to aid
moderate cost benefits
CY15 onward
Coal blocks to commence by mid-CY15, though cost benefit limited
Of the four coal blocks in Madhya Pradesh (MP) in JV with the state
government, two will get operational by mid-CY15, and would have the
potential to generate 1m tons of coal per year (20% of total requirement) at
INR2,700-3,000/ton (mining plus royalty cost). Overall potential of the four coal
blocks together is 2-2.5m tons per year.
The two coal-blocks which would be operational by CY15 have E-grade coal,
which would be used in CPP and could be blended with high grade coal in kiln.
While regulatory clearances are in place for two blocks, the other two blocks are
undergoing clearance process.
9 October 2013
6

ACC
Potential creeping acquisition by ACEM to re-align Holcim’s economic
interest in both companies and support stock price
Creeping acquisition
potential would support
ACC’s stock price
The acquisition of ACC by ACEM does not impact ACC’s shareholders
significantly. However, it would result in reduction in Holcim’s economic interest
in ACC from 50.3% to ~30%.
While reduction in economic interest of the parent would have been negative,
clarity over future growth plans and plans to re-align economic interest in the
future address minority shareholders’ interests.
ACEM intends to further increase its economic ownership in ACC by up to 10%
over 24 months post the completion of the transaction, not triggering an open
offer. The ACEM board’s in-principle approval is in place for a maximum amount
of INR30b. This implies ~40% premium to ACC’s share price.
Potential creeping by ACEM in the future would also provide support to ACC’s
stock price.
Dividend payout to remain healthy
We expect ACC to maintain its strong dividend payout (~50%).
Dividend from ACC would be welcomed by parent (ACEM) to support its balance
sheet strength, given commitments of (1) INR35b cash outgo (pertaining to
purchase of Holcim India’s stake in July 2014), (2) ongoing capex (including
Nagaur Plant) of ~INR40b over CY13-15, and (3) potential creeping acquisition of
ACC.
ACEM’s standalone balance sheet would require ACC’s dividend support
INR B
CY13E
CY14E
Beginning cash balance
38.7
39.4
OCF
14.8
19.4
Capex
-7.0
-13.0
Restructuring outgo
0.0
-35.0
Dividend outgo
-7.2
-8.1
Y/E cash balance
39.4
2.7
ACC dividend
3.3
Y/E cash balance
39.4
5.9
Additional 10% ACC stake purchase
Y/E cash balance
39.4
5.9
CY15E
2.7
23.6
-14.8
0.0
-9.0
2.6
3.8
9.6
-15
-5.4
CY15E
2.6
27.2
-18.3
0.0
-9.0
2.5
3.8
10.0
-15
-5.0
Improvement in capital efficiency led by synergy benefits
Multiple triggers such as
synergies, new plants and
improvement in efficiencies
would lead to better capital
efficiency over the
medium term
Presence of multiple triggers to profitability would drive better capital
efficiency. We expect ~4pp/3pp expansion in RoCE/RoE by CY16, driven by full
realization of synergy benefits.
We also believe upcoming capacity would have INR150-200/ton higher
profitability over the current average and would drive capital efficiency by 50-
70bp from CY16 onwards (not factored in our estimates).
Better profitability would accelerate cash deployment from CY16. Base case
synergy would aid INR5.5b of additional surplus cash over CY14-16. Including
pricing power, ACC could have almost INR9.8b of additional surplus cash.
9 October 2013
7

ACC
Expect 4%/3% RoCE/RoE expansion over CY14-16
CY13E
CY14E
29.2
24.9
17.5
19.8
16.9
13.1 14.0
21.8
18.7
13.1
14.7
18.6
CY15E
CY16E
22.7
17.5
18.9
25.1
RoCE
RoCE (With synergy)
RoE
RoE (With synergy)
Source: Company, MOSL
Superior earnings growth; strong balance sheet
Expect EPS growth to
outperform large cap peers
over CY13-16
Driven by synergies, ACC would witness strong earnings growth over the next
three years. Based on our ballpark estimates, ACC’s EPS would grow at 29%
CAGR over CY13-16 as against 17-19% CAGR for ACEM and UTCEM.
Further, despite capex, ACC’s balance sheet is likely to remain strong, with net
cash of ~INR35b in CY14 (completion of ongoing capex). Net cash on its book
would be ~17% of market cap.
Cash would be ~17% of market cap (as of CY14E)
ACC’s EPS can potentially grow at ~29% CAGR
Source: Company, MOSL
Source: Company, MOSL
Valuation and view
Pan-India presence and very strong brand equity makes ACC one of the best
proxies on the Indian Cement industry.
Resultant synergies arising from ACEM’s acquisition would improve ACC’s
operating efficiencies, especially considering its high operating leverage.
ACC trades at discount to its large peers on EV/ton basis due to lower
profitability. However, narrowing of profitability gap, superior earnings growth,
improvement in capital efficiency and strong balance sheet make it ripe for re-
rating.
We are yet to formally incorporate benefits of synergies. However, based on our
ballpark estimates, the stock trades at 16.6x CY14E EPS, and at an EV of 8x
CY14E EBITDA and USD83/ton. As full benefits of synergy are likely only after
CY15, we shift to asset-based valuation for ACC.
Upgrade to Buy
with a target
price of INR1,313 (EV of 9.75x CY14E EBITDA or ~USD100/ton).
8
9 October 2013

ACC
ACC is trading at significant discount to replacement cost
250
190
130
70
10
EV/ton (USD)
Replacement CosT (USD/Ton)
Source: Company, MOSL
ACC’s EV/EBITDA valuations are at average on below average profitability
17
13
9
5
1
1.6
EV/EBITDA(x)
Peak(x)
14.1
8.6
Avg(x)
Min(x)
Source: Company, MOSL
EV/Ton discount to its large peers is at its peak (%)
45
30
15
0
-15
Source: Company, MOSL
9 October 2013
9

ACC
Financials and valuation
9 October 2013
10

ACC
Financials and valuation
Income statement
Y/E December
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Interest
Other Income
Extraordinary items
PBT
Tax
Tax Rate (%)
Reported PAT
Adjusted PAT
Change (%)
Min. Int. & Assoc. Share
Adj Cons PAT
2009
80,272
10.2
25,277
31.5
3,421
21,856
843
2,404
-474
22,944
6,877
30.0
16,067
16,399
39.1
0
16,067
2010
77,173
-3.9
15,540
20.1
3,927
11,613
568
2,925
1,465
15,435
4,234
27.4
11,200
10,137
-38.2
0
11,200
2011
94,296
22.2
16,901
17.9
4,753
12,148
969
4,226
2,280
17,684
4,431
25.1
13,253
11,544
13.9
0
13,253
2012
111,305
18.0
19,681
17.7
5,589
14,092
1,147
4,923
-3,354
14,515
3,903
26.9
10,612
12,918
11.9
0
10,612
(INR Million)
2013E
110,402
-0.8
15,814
14.3
5,668
10,146
550
4,850
1,678
16,124
4,434
27.5
11,690
10,473
-18.9
0
11,690
2014E
122,857
11.3
18,617
15.2
6,074
12,544
450
5,250
0
17,344
5,030
29.0
12,314
12,314
17.6
0
12,314
Balance sheet
Y/E December
Share Capital
Reserves
Net Worth
Debt
Deferred Tax
Total Capital Employed
Gross Fixed Assets
Less: Acc Depreciation
Net Fixed Assets
Capital WIP
Investments
Current Assets
Inventory
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Curr. Liabilities
Provisions
Net Current Assets
Total Assets
2009
1,880
58,282
60,162
5,669
3,493
69,324
68,263
26,680
41,583
21,562
14,756
22,562
7,790
2,037
7,464
5,271
31,139
19,639
11,500
-8,578
69,324
2010
1,879
62,815
64,695
5,238
3,615
73,548
80,770
29,945
50,824
15,628
17,027
27,533
9,150
1,783
10,800
5,801
37,464
20,940
16,525
-9,931
73,548
2011
1,879
70,043
71,923
5,061
5,184
82,167
95,757
34,378
61,378
4,353
16,250
37,912
10,995
1,877
16,526
8,513
37,726
25,996
11,730
186
82,167
2012
1,880
71,949
73,828
850
5,169
79,848
98,719
39,967
58,752
3,000
25,536
31,975
11,336
3,035
6,784
10,821
39,415
25,574
13,841
-7,440
79,848
(INR Million)
2013E
2014E
1,880
1,880
83,639
88,307
85,518
90,187
850
850
5,411
5,671
91,780
96,708
103,719 105,719
45,635
51,709
58,083
54,010
9,000
21,000
18,949
15,303
45,068
50,153
12,099
13,464
3,025
3,366
18,905
21,037
11,040
12,286
39,321
43,757
25,710
28,611
13,611
15,147
5,747
6,395
91,780
96,708
E: MOSL Estimates
9 October 2013
11

ACC
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ACC LTD
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9 October 2013
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