ACC Valuations provide relative comfort :: Edelweiss

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􀂄 PAT lower than estimate; lower realisation & higher costs
ACC’s Q3CY10 performance was below our and consensus estimates. Drop in
realisation and decline in volumes led revenues to decline 17% Y-o-Y and 19%
Q-o-Q. Realisation was down by ~INR 22/bag Q-o-Q and ~INR 27/bag Y-o-Y on
account of significant price corrections across regions. Volumes dipped 8.3% Qo-
Q and 3.6% Y-o-Y due to poor demand, maintenance shutdowns, heavy
monsoons and floods and non-availability of fly ash. Other income includes INR
100 mn on account of air pollution control.

􀂄 Higher raw material, staff costs and other expenses hit margins
Higher purchase of clinker and increase in slag and fly ash prices, Q-o-Q, pushed
input cost per tonne from INR 501/t to INR 686/t (including stock adjustments).
Other expenses increased by 13.8% Y-o-Y because of increase in royalty,
repairs, advertisement and consultancy charges. Employee cost was up 17% Yo-
Y and 10.4% Q-o-Q in Q3. Higher coal and power cost was offset by lower
clinker production, leading to flat power & fuel costs. Lower clinker production
was due to temporary shutdown of Wadi II plant to accommodate expansion.

􀂄 Capacity expansion projects on track
The expansion projects in Orissa (Bargarh) and Karnataka (Wadi) have begun
commercial operations and are stabilising. The 3 mtpa cement plant at Chanda
(Maharashtra; capex of INR 14.5 bn), along with 25 MW of CPP, is nearing
completion and is likely to come on stream in Q4CY10. With completion of the
above, ACC’s capacity will reach 30 mtpa from 26 mtpa currently. The company
acquired 45% stake in Asian Concrete and Cement for INR 368 mn during the
last quarter. Asian Concrete and Cement currently has a 0.3 mtpa grinding unit
in Himachal Pradesh which is likely to increase to 1.3 mtpa .

􀂄 Outlook and valuations: Turning favourable; upgrade to ‘HOLD’
We continue to maintain our negative view on the sector as we believe oversupply
is likely to hamper realization growth. However, considering unsustainably low
price levels in Q3CY10, we expect part of the recent hikes of ~INR 10-50/bag to
sustain. We raise our blended realisation estimate for ACC, resulting in 17%
upgrade to our CY11E PAT. At CMP of INR 980/share, the stock is trading at
EV/tonne of USD 122 on CY11E. We prefer ACC since it is a pan-India player and
given its cheaper valuations than its peers - Ultratech (EV/t USD 142) and Ambuja
(EV/t USD 169). Thus, we upgrade the stock to ‘HOLD’ and rate it ‘Sector
Outperformer’ on relative return basis