ACC -Worst quarter over, recovery ahead; re-iterate Buy says Anand Rathi

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ACC -Worst quarter over, recovery ahead; re-iterate Buy

n       3QCY10 results. ACC’s net profit was lower than consensus and our estimates and declined 77% yoy. A drop in realisation and volume and rise in overall costs hit profitability. We estimate CY11 earnings to be driven by recent price recovery and strong volume growth. We maintain our target price and re-iterate Buy.

n       Realisation declines yoy. Realisation declined 14% yoy and 11% qoq at ~Rs3,390/ton due to high exposure (38%) to the southern markets, where prices declined the most in 3QCY10. Cement volumes were down 3.7% yoy and 9% qoq to 4.83m tons. Volumes were impacted by closure of Wadi II kiln (to facilitate expansion) and heavy monsoons in most part of the country.

n       EBITDA drops sharply. EBITDA/ton, at ~ Rs350, is the lowest since 3QFY06 and dropped 74% yoy and 66% qoq mainly due to fall in realisation. Raw material rose Rs100/ton yoy owing to higher purchase of clinker and rise in slag & flyash prices. ‘Other expenses’ at ~ Rs930/ton rose 24% yoy and 16% qoq on increase in royalty, repairs, packing material and inventory-related expenses.

n       Outlook. The 2.3m-ton kiln at Wadi (Karnataka) and 25MW CPP at Chanda (Maharashtra) were commissioned in 3QCY10. The new 3m-ton cement plant at Chanda will be commissioned in 4QCY10, enhancing capacity to 30m tons. This is expected to lead to strong volume growth in CY11. ACC expects sustained pace of infra development and good monsoons to propel cement demand growth.

n       Valuation. At our target price of Rs1,125, the stock would trade at 7.5x CY11e EV/EBITDA, in line with its 10-year average. The target price implies EV/ton of US$135 and PE of 14.3x.