Associated Cements Worst over but recovery long drawn:: Macquarie Research,

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Associated Cements
Worst over but recovery long drawn
Event
 3Q results – a new bottom: ACC reported 60% lower than expected results
during the quarter, due to weaker than estimated realisations and sales
volume as well as higher than expected costs. We are reducing estimates
21% for CY10 and CY11 and believe that oversupply issue will take some
time to weed out, though this quarter has seen the worst. We maintain
Underperform rating on ACC and target price at Rs771.
Impact
 Weak results continue: ACC reported net sales at Rs17.5bn, down 18%
YoY as sales volume at 4.83mt was down 4.5% YoY, and realization at
Rs3,390/t was down 12.9% YoY. The company reported EBITDA Rs1.65bn or
Rs342 per ton. Net profit was at Rs863mn, down 75% QoQ and 79% YoY.
 Recovery expected but a muted one: We expect oversupply issue to keep
the cement prices subdued for at least another 12 months. We do take notice
of the recent attempts by the industry to artificially increase the cement prices,
but don’t expect these measures to have a lasting impact without fundamental
support.
 Still reducing earnings estimates: We have reduced our CY10 and CY11
earnings by 21% as we cut sales volume due to delays in capacity
expansions and also built in higher staff costs. Our assumptions factor in
EBITDA margin of Rs760/t for 4Q and Rs713/t for CY11, a sharp recovery
from Rs342/t achieved this quarter.
 Downside to consensus earnings: Consensus is estimating EPS of Rs69.4
and Rs71.4 per share for CY10 and CY11. Our new estimates are 13% and
19% below current consensus forecasts.
Earnings and target price revision
 We are revising our estimates by -21%, -21% and +18% for CY10, CY11 and
CY12 to Rs60.4, Rs58.1 and Rs72.5 per share, respectively.
Price catalyst
 12-month price target: Rs771.00 based on a DCF methodology.
 Catalyst: Continued weak demand and volume
Action and recommendation
 Maintain Underperform: Muted volume growth, low margins don’t make an
exciting picture. ACC has rallied on news on increase in cement prices but
given the risks of earnings downgrade, we see further downsides. The stock
is also expensive, currently trading at 16.9x CY11 earnings, as compared to
historical average of 12.0x and current peer group average of 15.0x. Maintain
Underperform.