ICICI Securities: Buy ACC target rs 1200

ACC has been a laggard in terms of volume growth over the past two years and
its market share has declined to ~9.9% at present from 11.7% in ’08 due to
capacity constraint, wagon shortage and unavailability of key raw materials.
However, its 1mnte Bargarh plant (in the East) and 3mnte Wadi capacity (in the
South) would be ramped-up by December ’10. Besides, its 3mnte Chanda plant
(in the West) would be operational by Q1CY11. Hence, we expect ACC to post
volume growth in line with the industry after December ’10. ACC is focussing on
improving its operating efficiencies via increased use of CPPs and alternative
fuels, higher domestic coal linkages and SG&A rationalisation. Pan-India
presence, better market mix, strong brand equity (ACC is the oldest cement
brand) and higher rural penetration would boost realisations. Corporate action in
the form of special dividend / bonus share is a possibility as ’10-11 is being
marked as a Platinum Jubilee Year. Maintain BUY with revised target price of
Rs1,200 (7.7x average of CY11-12E EV/E). Increase in stake by Holcim and merger
with Ambuja Cements can provide additional triggers. ACC is our top pick.
􀁦 Next phase of expansion likely to be announced by end-CY10. ACC is likely to
announce ~7mnte new capacities in North / East (to maintain its market share),
which is expected to be operational post CY13E. ACC has a net cash of Rs8.5bn
and is expected to generate FCF of ~Rs22bn over CY10-12E.
􀁦 Better cost efficiencies to contain margin erosion. ACC is setting up 90MW
CPP, taking the total CPP to 351MW which would increase its CPP consumption to
~80% from 70%. ACC imports only 10% of its coal requirement, whereas it has
linkages for 60-65% – the biggest cost advantage among peers. Increased use of
alternative fuels and industrial wastes led to Rs408mn savings in ’09 versus
Rs228mn in ’08. Besides, EBIT losses from the RMC business have reduced to
Rs477mn in ’09 from Rs918mn in ’08; RMC will likely turn around by ’11. ACC is
expected to have significant coal cost advantage in the long term via insourcing of
coal from the mines (currently being developed through JVs with the state
Governments of Madhya Pradesh and West Bengal), which will be operational over
the next 3-4 years.
􀁦 EPS CAGR of 15% over CY11E-12E. We factor in a 10% volume growth over
CY11E-12E with average realisation inching up 1.5-3.5% over CY11E-12E. EBITDA
margin will likely remain in the band of 24.5-25.5% over CY10-12E. We raise our
CY10-11E EBITDA estimates ~3-5%.