Analyst Corner: Maintain buy on ACC with target price of Rs 2,105

By Edelweiss Securities

ACC’s Board of directors has approved renewal of the Technical and Know-How (TKH) agreement with parent Holcim Technology (HTL) on same terms as the current agreement. Accordingly, ACC (similar to parent Ambuja Cement) will continue to pay TKH fee @ 1% of net sales each year for the next two years.

The development clears clouds over the TKH issue, which had weighed on ACC’s stock price since the past few weeks. Roll over of the fee on existing terms will delight investors given Street’s concern of a potential increase in the same. The development is in line with our expectation. Maintain ‘buy’ with TP of Rs 2,105.

Much to the delight of investors, ACC’s Board has renewed the TKH agreement with HTL for the next two years (2021 and 2022) on the same terms as in the current agreement. Accordingly, ACC will continue paying a TKH fee @ 1% of net sales i.e. nearly Rs 1.4bn each, over the next two years. TKH was first introduced in 2013 and initially approved for five years (2013–17). Thereafter, it was renewed in 2018, with no increase in fee, for three years (2018– 20). The renewal for 2021-22 is a simple roll over of the same agreement and is in line with our expectation.

We continue to like pan-India player ACC given it will be beneficiary of expected demand recovery in CY21. ACC’s efforts to: a) improve energy efficiency by installing 25MW Waste Heat Recovery-based power plants (in phase I; b) chances of pursuing such projects in future as well; c) rationalise fixed cost; and d) generate tangible logistical synergies with subsidiary ACC via a master supply agreement (MSA), will boost investor confidence in the stock.
Given these multiple positives, we continue to value ACC at 12x CY21E EV/Ebitda. We maintain ‘Buy/SN’ with TP of Rs 2,105/share.