Nomura research: ACC: A case of bad timing

A case of bad timing
 Incremental capacity in the South
At the start of the year, ACC had set up new capacity in southern
India. However, as the oversupply situation in the South has
worsened over the past six to nine months, the company is finding it
difficult to ramp up production from its new capacity. As a result, its
cement despatch volumes clocked negative growth in the first eight
months of the year. This has exerted pressure on ACC’s profitability,
which is already depressed due to widespread price corrections.
 Return ratios to deteriorate
ACC has historically delivered high investment returns, with its ROE
and ROCE ranging in a healthy range of 25-40%. However, we
believe it will be difficult for ACC to maintain these ratios and project
an average ROCE of 21.1% over CY10F–CY12F.
 Change in estimates
We have revised our earnings estimate for CY10 and CY11F to reflect:
1) lower volumes, 2) better price realisation and 3) lower power and
fuel costs. The overall impact is positive for both CY10F and CY11F
as the quantum of upsides from lower costs are far higher than the
downside from lower volumes.
 Valuations
We move over to an EV/IC-based valuation methodology for ACC
from the EV/EBITDA-based technique used previously. Our new price
target of INR917 implies 9% potential downside from current levels
and implies a CY11F EV/EBITDA of 6.8x and a CY11F EV/tonne of
US$124.