ACC Ltd Sept 2010 qtr Results not as bad they seem:: RBS

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ACC Ltd
Results not as bad they seem
Abnormal conditions at two plants resulted in weak 3Q results. The market is
looking for an improving 4Q outlook given recent cement price hikes, but we still
worry that oversupply, and hence price cuts, could persist in the next 15 months.
We cut FY10F EPS 14%, but raise it 4% in FY12F; Sell with a Rs730.93 TP.



3QFY10 results worse than we expected, partly due to exceptional conditions
ACC reported a 74.8% drop in 3Q EBITDA, versus our expectation of a 43% decline. Sales
realisation dropped 13.8%, while cement volumes were lower by 3.6%. ACC recorded
EBITDA of Rs342/mt, the lowest in the past six years. Management highlighted two one-off
factors that partly contributed to this: 1) ACC’s unit in Maharashtra faced floods, which
impacted the clinker unit. Hence, the company had to rely on outsourced clinker, impacting
margins. 2) The existing unit in Wadi, Karnataka, was virtually dislocated through the quarter
because of expansion work, impacting volumes from the unit. Again, the company had to
outsource material to compensate for the production loss. Both plants have been back to
normal levels of production since mid-October.
Is the worst behind us in terms of margins?
Recent price hikes have largely reversed the price declines in 3QFY10 in most markets,
particularly in South India. The hikes are sharper than our expectations. We estimate
domestic cement capacity of 285.5m metric tonnes by end-FY11 and 304.3mmt by end-
FY12, and demand of 216.2mmt and 235.6mmt, respectively. Considering the industry's
FY12F (year-end March) capacity utilisation rate of 75%, we believe production discipline is
needed over the next 15 months to keep prices stable. However, based on historical trends,
we are unsure that the price hikes can be sustained.
Earnings downgrade for FY10F, maintain Sell
We have cut our FY10 EPS 13%, but largely kept FY12/13 forecasts. The EBITDA margin of
Rs342/mt in 3QFY10 could be the bottom, but at 8.2x FY12F EV/EBITDA, ACC does not
look cheap to us. Also, though the structural cement demand outlook looks strong, we
remain cautious on cement prices in the medium term. This is due to potential oversupply
from lack of production discipline, which, in a fragmented industry in India (of over 40
players) is difficult to maintain for long. Our DCF valuation has marginally risen, reflecting the
earnings cut and the rolling forward to FY12F. Sell; target price Rs730.93 (Rs720.93 earlier).