ACC: In the region of comfort-- Elara

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In the region of comfort
Pan-India presence to reduce regional risks
ACC Limited (ACC) has a presence in all five regions of India, hence
runs a lower regional risk as compared to other major cement players.
Out of the total ~27.5 mn tonnes of capacity, 36% is in South India,
where, we believe due to the surplus situation, pricing power will be
the lowest. However, we consider that the presence of the company in
other regions with a better demand supply situation (23% in Eastern
region and 19% in Central region) will improve its overall profitability.
Thus, the pan-India presence of the company will insulate it from
regional risks.


Reliance on domestic coal to insulate margins from rising costs
Power and fuel costs constitute ~27% of the ACC’s cost of goods sold.
The company meets 85% (75% through linkages) of its fuel
requirement through the domestic coal. Prices of domestic coal are not
as volatile as that of imported coal. Thus dependence on domestic coal
provides a greater cost visibility to ACC as compared to its peers. Prices
of imported coal have increased ~42% YoY. We believe that ACC will
have a cost advantage of ~INR 96/ tonne as compared to players
depending on imported coal, and INR103/ tonne as compared to
players dependent on petcoke.

Healthy balance sheet to support distress acquisitions
At the end of CY09, ACC had a net cash and investment of INR16.6bn
and net debt equity ratio of -0.15. We expect ACC to generate free
cash flow of INR11.3bn over next two years. Thus, the net cash and
investment of the company is expected to increase to ~INR28.5 bn
(INR 152 per share, i.e. 14% of CMP) by end of CY11. Strong balance
sheet will also enable the company to capitalize on any distress
opportunity that might be available in the down turn.

Valuation
At the CMP of INR 1,062 per share, the stock is trading at 16.7x and
15x its CY10 and CY11 earnings, respectively. It is trading at
EV/tonne of USD131 and USD122 of its CY10 and CY11 capacities,
respectively. With narrowing of the gap in debt equity ratio and
EBITDA per tonne between ACC and Ambuja, we expect that the
valuations gap between the two also to narrow down further.
(Kindly refer to Exhibit no. 12 and Exhibit no. 13 on page no 49).
Thus we are initiating our coverage on ACC with Accumulate
rating and a price target of INR1,123 per share. We have valued the
company at USD133 on CY11 capacity.