Weak numbers in peak quarter

INDUSTRY CEMENT CMP (as on 21 April 17) Rs 1,495 Target Price Rs 1,300 Nifty 9,119 Sensex 29,365 KEY STOCK DATA Bloomberg/Reuters ACC IN No. of Shares (mn) 188 MCap (Rs bn) / ($ mn) 281/4,346 6m avg traded value (Rs mn) 585 STOCK PERFORMANCE (%) 52 Week high / low Rs 1,738 / 1,257 3M 6M 12M Absolute (%) 12.7 (4.5) 4.3 Relative (%) 4.1 (9.1) (9.1) SHAREHOLDING PATTERN (%) Promoters 54.53 Weak numbers in peak quarter ACC s numbers beat estimates marginally (EBITDA at Rs 476/t, our est was Rs 453, -13.6% YoY, 34.6% QoQ). Pricing declined 2.2% QoQ (Rs 4,265/t, 3.8% YoY), while new East capacities (~4 mtpa) helped it deliver a 3.8% volume growth (6.6 mt). These peak season numbers hardly inspire confidence. ACC s under-performance is driven by its legacy operations and high fixed costs which undo its strong brand advantage. Along with its parent, it continues to lose market share to aggressive competitors in most regions. Further, the capacity addition in East has come at a time when the market is oversupplied and is likely to remain so for near future, eroding strong pricing that cement players once commanded. Driven by expensive valuations we retain our SELL with (TP: Rs 1,300, 8.0x CY18 EV/EBITDA), while largely retaining our earnings estimates. RESULTS REVIEW 1QCY17 22 APR 2017 ACC SELL Highlights of the quarter Restatement of the prior quarter s numbers for IndAS resulted in EBITDA/t for 4QCY16/ being restated higher by Rs 57/11/t. Freight costs were higher (9.1% YoY, 2.6% QoQ), driven by higher diesel prices and inter-unit clinker transfer. It also indicated an increase in its RM costs, owing to issues with fly ash availability. Near-term outlook: Cement prices have nearly recovered from the shock of demonetisation, and are back to October 2016 levels in most regions. However, our channel checks suggest that demand remains weak, and prices are susceptible to rollbacks. RM and freight costs will trend higher, owing to constrained fly ash availability and strict restrictions on overloading in UP and Rajasthan. FIs & Local MFs 16.68 FIIs 14.26 Public & Others 14.53 Source : BSE Ankur Kulshrestha, CFA ankur.kulshrestha@hdfcsec.com +91-22-6171 7346 Sarfaraz Singh sarfaraz.singh@hdfcsec.com +91-22-6171 7331 Financial Summary (Standalone) (Rs mn) 1QCY17 YoY (%) 4QCY16 QoQ (%) CY14 CY15 CY16 CY17E CY18E Net Sales 30,997 28,727 7.9 26,346 17.7 114,811 114,328 109,364 127,463 148,988 EBITDA 3,418 3,775 (9.5) 2,231 53.2 15,065 15,372 14,170 21,179 28,188 PAT 2,115 2,347 (9.9) 1,233 71.5 11,683 6,051 6,452 11,812 17,144 Diluted EPS (Rs) 11.3 12.5 (9.9) 6.6 71.5 62.2 32.2 34.3 62.8 91.2 P/E (x) 24.1 46.5 46.7 23.8 16.4 EV / EBITDA (x) 17.6 17.4 18.5 12.4 9.0 RoE (%) 14.0 7.1 6.6 12.6 17.6 Note: CY16 as per Indian GAAP, IndAS restated numbers not reflected HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters

EBITDA/t at Rs 476 remains weak, and does not inspire confidence The increase in freight costs (9.1% YoY, 2.6% QoQ) was driven by higher diesel prices and inter-unit clinker transfer. Quarterly Financials Snapshot (Rs mn) 1QCY17 YoY (%) 4QCY16 QoQ (%) Net Sales 30,997 28,727 7.9 26,346 17.7 Cement 28,147 26,134 7.7 23,724 18.6 RMC 2,850 2,593 9.9 2,622 8.7 Power & Fuel 6,477 5,672 14.2 5,315 21.9 Freight Expenses 8,305 7,332 13.3 6,683 24.3 RM Costs 4,607 4,367 5.5 3,798 21.3 Employee costs 1,952 1,823 7.1 1,995 (2.2) Changes to inventory 42 83 (49.1) 158 (73.3) Other Operating Expenses 6,197 5,676 9.2 6,167 0.5 EBITDA 3,418 3,775 (9.5) 2,231 53.2 Other operating income 744 632 627 Other Income 357 499 307 Interest Cost 252 188 209 Depreciation 1,650 1,434 1,679 PBT 2,617 3,284 (20.3) 1,277 104.9 Tax 502 937 44 E/o 0 0 (428) RPAT 2,115 2,347 (9.9) 805 162.8 Adjustments 0 0 428 APAT 2,115 2,347 (9.9) 1,233 71.5, Per Tonne Analysis Per tonne data 1QCY17 YoY (%) 4QCY16 QoQ (%) Volumes (mt) 6.6 6.4 3.8 5.5 21.1 Realisations (Rs/T) 4,265 4,109 3.8 4,353 (2.0) P&F costs (Rs/T) 981 892 10.0 975 0.6 Freight costs (Rs/T) 1,258 1,153 9.1 1,226 2.6 RM costs (Rs/T) 698 687 1.7 697 0.1 Employee costs (Rs/t) 296 287 3.2 366 (19.2) Other costs (Rs/t) 945 906 4.4 1,161 (18.5) Cement EBITDA/T (Rs/t) 476 550 (13.6) 353 34.6 Cement division costs (Rs/t) 3,789 3,559 6.5 4,000 (5.3) Cement EBITDA/t calculated using EBITDA of Rs 278mn for RMC Page 2

Restatement of the prior quarters numbers for IndAS resulted in EBITDA/t for 4QCY16/ being restated higher by Rs 57/11/t. Changes Due To IndAS Accounting (Rs mn) 4QCY16 Restated Reported Difference Restated Reported Difference Net Sales 28,727 29,274 (547) 26,346 26,686 (340) Cement 26,134 26,528 (394) 23,724 23,857 (133) RMC 2,593 2,746 (153) 2,622 2,829 (207) Power & Fuel 5,672 5,672 0 5,315 5,315 0 Freight Expenses 7,332 7,332 0 6,683 6,683 0 RM Costs 4,367 4,577 (210) 3,798 4,057 (259) Employee costs 1,823 1,892 (69) 1,995 2,088 (93) Changes to inventory 83 83 0 158 158 0 Other Operating Expenses 5,676 6,022 (346) 6,167 6,470 (303) EBITDA 3,775 3,696 78 2,231 1,915 315 Other operating income 632 632 0 627 627 0 Other Income 499 489 10 307 168 139 Interest Cost 188 164 24 209 185 24 Depreciation 1,434 1,434 0 1,679 1,679 0 PBT 3,284 3,220 64 1,277 847 430 Tax 937 898 39 44 (64) 108 E/o 0 0 0 (428) (428) 0 RPAT 2,347 2,322 25 805 483 322 Adjustments 0 0 0 (428) 0 (428) APAT 2,347 2,322 25 1,233 483 750 Page 3

ACC remains expensive, despite continued underperformance Peer Valuation Company MCap (Rs bn) CMP (Rs) Rating TP (Rs) EV/EBITDA (x) P/E (x) EV/T (US$) FY18E FY19E FY18E FY19E FY18E FY19E Ultratech Cement 1,095.1 3,978 SELL 3,380 30.1 23.7 17.0 13.6 257 244 Shree Cement 613.0 17,596 SELL 13,907 36.4 26.3 17.6 12.8 250 226 Ambuja Cement 1 474.0 239 SELL 200 31.1 22.4 12.8 9.5 157 149 ACC 1 281.4 1,495 SELL 1,300 25.5 17.3 13.3 9.6 124 120 Ramco Cements 159.7 671 SELL 456 22.8 18.8 12.8 10.6 201 192 Birla Corp 57.7 749 NEU 678 66.5 27.0 11.4 9.5 106 103 Orient Cement 31.3 153 NEU 165 37.0 14.2 10.9 8.1 70 68 Sanghi Industries 15.8 72 BUY 83 8.7 5.7 5.2 3.5 71 61 Deccan Cements 8.0 1,142 BUY 1,468 15.8 13.8 7.2 5.3 55 51 Note: Prices as of Apr 21, 2017, close. US$: INR = 65 1 December YE Key Assumptions CY14 CY15 CY16 CY17E CY18E Cement & Clinker Volumes (mn t) 24.6 23.7 23.2 24.7 27.6 Blended Realisations (Rs/t) 4,368 4,419 4,281 4,709 4,944 P&F Cost/Tonne (Rs/t) 1,004 1,002 924 1,040 1,053 Raw Material Cost/Tonne (Rs/t) 654 646 588 647 652 Freight Cost/Tonne (Rs/t) 882 923 917 935 1,000 EBITDA/tonne 494 472 484 705 871 Page 4

EBITDA/t at Rs 476, altogether a weak quarter Volume growth driven by capacity additions Sales volume (mt) YoY % 8.0 mnt 20.0 Prices weakened QoQ 5,000 Realisation per tonne (Rs) YoY (%) Rs/T % 30.0 7.0 15.0 6.0 5.0 4.0 3.0 2.0 1.0 10.0 5.0 - (5.0) (10.0) 4,500 4,000 3,500 15.0 0.0-15.0 0.0 (15.0) 3,000-30.0 1QCY10 3QCY10 1QCY11 3QCY11 1QCY12 3QCY12 1QCY13 3QCY13 1QCY14 3QCY14 1QCY15 3QCY15 3QCY16 1QCY17 1QCY10 3QCY10 1QCY11 3QCY11 1QCY12 3QCY12 1QCY13 3QCY13 1QCY14 3QCY14 1QCY15 3QCY15 3QCY16 1QCY17 EBITDA/t At Rs 476 Freight costs increased due to higher diesel prices EBITDA/T (Rs) YoY (%) P&F Freight RM cost Oth. Exp. Empl. 1,200 1,000 800 600 400 200 - Rs/T % 120.0 100.0 80.0 60.0 40.0 20.0 0.0-20.0-40.0-60.0-80.0-100.0 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 - Rs/T 1QCY10 3QCY10 1QCY11 3QCY11 1QCY12 3QCY12 1QCY13 3QCY13 1QCY14 3QCY14 1QCY15 3QCY15 3QCY16 1QCY17 1QCY10 3QCY10 1QCY11 3QCY11 1QCY12 3QCY12 1QCY13 3QCY13 1QCY14 3QCY14 1QCY15 3QCY15 3QCY16 1QCY17 Page 5

Income Statement Year ending Dec (Rs mn) CY14 CY15 CY16 CY17E CY18E Net sales 114,811 114,328 109,364 127,463 148,988 Growth % 5.2 (0.4) (4.3) 16.5 16.9 Material Expenses 80,331 79,099 74,181 84,038 96,526 Employee Expenses 7,466 7,699 7,783 8,172 8,581 SG&A Expenses 6,453 7,202 6,858 7,668 8,860 Other operating expenses 8,060 8,596 8,591 8,322 8,850 Operating profits 12,501 11,732 11,951 19,263 26,170 Operating Profit Margin (%) 10.9 10.3 10.9 15.1 17.6 Other operating income 2,564 3,641 2,219 1,916 2,018 EBITDA 15,065 15,372 14,170 21,179 28,188 EBITDA % 13.1 13.4 13.0 16.6 18.9 EBITDA Growth % (12.1) 2.0 (7.8) 49.5 33.1 Depreciation 5,576 6,521 6,052 6,820 7,060 EBIT 9,489 8,852 8,118 14,359 21,129 Other Income (including EO items) 2,691 (338) 699 1,447 1,730 Interest 828 673 729 57 0 PBT 11,352 7,840 8,089 15,749 22,859 Tax (331) 1,924 2,065 3,937 5,715 RPAT 11,683 5,916 6,024 11,812 17,144 EO (Loss) / Profit (Net Of Tax) - (134) (428) - - APAT 11,683 6,051 6,452 11,812 17,144 APAT Growth (%) 21.3 (48.2) 6.6 83.1 45.1 Adjusted EPS (Rs.) 62.2 32.2 34.3 62.8 91.2 EPS Growth (%) 21.3 (48.2) 6.6 83.1 45.1, Standalone numbers displayed Note: CY16 as per Indian GAAP, IndAS restated numbers not reflected Balance Sheet As at December (Rs mn) CY14 CY15 CY16 CY17E CY18E SOURCES OF FUNDS Share Capital 1,880 1,880 1,880 1,880 1,880 Reserves 80,477 82,552 84,735 88,783 94,731 Total Shareholders Funds 82,356 84,431 86,615 90,662 96,611 Total Debt 0 355 500 0 0 Deferred Taxes 5,356 4,692 5,582 5,582 5,582 Long Term Provisions & Others 1,159 1,199 1,317 1,317 1,317 TOTAL SOURCES OF FUNDS 88,871 90,676 94,013 97,561 103,509 APPLICATION OF FUNDS Net Block 55,984 52,850 74,624 72,803 70,744 CWIP 21,213 26,695 3,551 3,551 3,551 Investments 2,909 2,746 2,359 2,359 2,359 LT Loans and Advances 10,096 12,411 13,515 13,515 13,515 Total Non-current Assets 90,202 94,702 94,049 92,229 90,169 Inventories 12,556 11,886 12,238 13,045 16,506 Debtors 4,107 4,844 4,677 5,047 6,319 Other Current Assets 2,985 3,050 3,972 3,972 3,972 Cash & Equivalents 16,864 13,928 19,439 19,559 26,944 Total Current Assets 36,511 33,707 40,325 41,623 53,740 Creditors 7,502 8,741 12,569 8,500 12,608 Other Current Liabilities & Provns 30,340 28,992 27,792 27,792 27,792 Total Current Liabilities 37,842 37,733 40,362 36,292 40,400 Net Current Assets (1,331) (4,026) (37) 5,331 13,339 TOTAL APPLICATION OF FUNDS 88,871 90,676 94,012 97,560 103,508 Page 6

Cash Flow Year ending Dec (Rs mn) CY14 CY15 CY16 CY17E CY18E Reported PBT 11,352 7,840 8,089 14,705 21,612 Non-operating & EO items (2,691) 338 (699) (1,441) (1,704) Interest expenses 828 673 729 57 - Depreciation 5,576 6,521 6,052 6,820 7,060 Working Capital Change 1,329 (375) 1,906 (5,247) (624) Tax paid (2,354) (2,289) (2,065) (3,676) (5,403) OPERATING CASH FLOW ( a ) 14,040 12,708 14,011 11,217 20,941 Capex (16,462) (12,177) (6,079) (5,000) (5,000) Free cash flow (FCF) (2,422) 531 7,932 6,217 15,941 Investments (1,178) 164 386 - - Non-operating Income 2,691 (338) 699 1,441 1,704 INVESTING CASH FLOW ( b ) (14,949) (12,351) (4,994) (3,559) (3,296) Debt Issuance/(Repaid) (67) (309) 1,035 (500) - Interest expenses (828) (673) (729) (57) - FCFE (3,317) (451) 8,238 5,660 15,941 Share Capital Issuance - - - - - Dividend (7,575) (3,841) (3,842) (6,981) (10,260) FINANCING CASH FLOW ( c ) (8,470) (4,824) (3,536) (7,538) (10,260) NET CASH FLOW (a+b+c) (9,379) (4,467) 5,482 121 7,384 EO Items/Others 1,532 Closing Cash & Equivalents 16,864 13,929 19,409 19,559 26,944 Key Ratios CY14 CY15 CY16 CY17E CY18E PROFITABILITY (%) EBITDA Margin 13.1 13.4 13.0 15.9 18.3 APAT Margin 10.2 5.3 5.9 8.7 11.0 RoE 14.0 7.1 6.6 11.8 16.8 Core RoCE 11.7 5.8 6.4 12.4 19.1 RoCE 15.1 9.1 8.1 12.5 17.3 EFFICIENCY Tax Rate (%) 0.2 24.5 25.5 25.0 25.0 Asset Turnover (x) 1.1 1.0 1.0 1.1 1.3 Inventory (days) 38 39 40 37 37 Debtors (days) 13 14 16 14 14 Payables (days) 22 26 36 30 26 Cash Conversion Cycle (days) 29 27 21 20 24 Debt/EBITDA (x) - - - - - Net D/E (0.20) (0.16) (0.22) (0.22) (0.28) Interest Coverage 14.7 11.3 9.4 NM NM PER SHARE DATA EPS (Rs/sh) 62.2 32.2 32.1 58.7 86.2 CEPS (Rs/sh) 91.8 66.2 64.2 95.0 123.8 DPS (Rs/sh) 34.0 17.0 16.9 31.0 45.5 BV (Rs/sh) 438.2 449.2 460.8 482.4 514.0 VALUATION P/E 24.1 46.5 46.7 25.5 17.3 P/BV 3.4 3.3 3.2 3.1 2.9 EV/EBITDA 17.6 17.4 18.5 13.0 9.4 OCF/EV (%) 5.3% 4.7% 5.3% 4.3% 8.2% FCF/EV (%) (0.9%) 0.2% 3.0% 2.4% 6.3% FCFE/Market Cap (%) (1.2%) -0.2% 2.9% 2.0% 5.7% Dividend Yield (%) 2.3 1.1 1.1 2.1 3.0 NM: Not Meaningful Page 7

RECOMMENDATION HISTORY ACC 1,800 1,700 1,600 1,500 1,400 1,300 TP Date CMP Reco Target 29-Apr-16 1,438 SELL 1,224 27-Jul-16 1,676 SELL 1,235 7-Oct-16 1,630 SELL 1,376 22-Oct-16 1,566 SELL 1,321 6-Feb-17 1,424 SELL 1,300 22-Apr-17 1,495 SELL 1,300 1,200 1,100 Rating Definitions 1,000 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period Page 8

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