ACC | 4QCY2010 Result Update; Performance Highlights -Angel Broking

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For 4QCY2010, ACC’s adjusted net profit declined by 44.1% yoy to `157cr due
to the substantial fall in realisations and higher operating expenses. During the
quarter, the company recorded extra-ordinary gain of `99cr on account of: i)
`82cr of write-back of earlier year tax provisions, ii) `64.4cr of earlier year sales
tax provision written back, iii) however, `47.3cr was provided for spare parts
relating to previous years. Going ahead, we expect the company’s dispatches to
improve owing to better demand outlook. At current levels, we maintain our
Neutral view on the stock.

OPM dips 829bp yoy due to low realisations and higher power and fuel costs:
During 4QCY2010, ACC’s net sales grew by a marginal 1.9%, primarily on
account of the 4.6% increase in dispatches to 5.6mn tonnes. However,
realisations declined by ~2.7% yoy to `3,508. OPM dropped by 829bp yoy to
17.4% on the back of higher power and fuel costs, and lower realisations.
However, on a qoq basis, OPM rose by 386bp due to the improvement in
realisations in the southern region, one of major markets of the company.

Outlook and valuation: We expect ACC to register 8.3% CAGR in top-line over
CY2010-12, aided by capacity addition. However, bottom-line is expected to
de-grow at the compounded rate of 2.3% over the mentioned period due to
higher operating costs. At current levels, the stock is trading at an EV/EBITDA of
8.9x and EV/tonne of US $107 based on CY2012 estimates. We maintain our
Neutral view on the stock.


Operational highlights
For 4QCY2010, ACC’s realisation/tonne declined by 2.7% yoy to `3,496.
However, raw material cost/tonne grew by a substantial 25.5% yoy on the back of
the rise in raw material prices such as slag and fly ash, and due to stock
adjustments. Power and fuel cost/tonne increased by 9.2% yoy to `806. Operating
profit/tonne stood at `493, down 38.8% yoy. Net profit/tonne stood at `280,
down 31.3% yoy.


Investment arguments
Growth to be driven by capacity addition
During CY2010, ACC completed expansion at Bargarh, taking the plant’s total
capacity to 2.1mtpa. The company has also begun trial run at the 3mtpa
clinkering plant in Chanda during November and the operations are expected
to be ramped up in 1HCY2011. ACC’s current installed cement capacity
stands at 30mtpa. The company has also commissioned the 25MW captive
power plant in Chanda, which would be sufficient to meet entire power
requirements of the cement plant. The company’s total captive power capacity
(CPC) stands at 346MW.


ACC has also been increasing capacity through inorganic route by acquiring
stakes in smaller companies. In line with this, ACC has 45% stake in Asian Cement
and 100% stake in Encore Cement. Asian Cement, which has a 0.3mtpa grinding
unit in Himachal Pradesh, is enhancing capacity by another 1mtpa. Encore
Cement has a 0.2mtpa slag grinding unit at Vishakapatnam. Over CY2010-12,
on the back of strong balance sheet and healthy free cash flow, ACC would be
well-placed to fund its next round of expansion.
Pan-India presence to balance poor regional demand-supply dynamics
ACC is a pan-India player, and is hence insulated, to a large extent, from the risks
of demand slowdown and price collapse in any particular region. The company’s
brands are also popular across the country. Post the recent capacity expansions,
the south, west, north, central and east regions would contribute 23%, 22%, 19%,
18% and 16% respectively, to the company’s overall revenues. Thus, the
company’s exposure to the southern region, which is facing excess capacity and
low demand over the past one year, is limited.
Increased use of captive power to improve operating margins
Captive power has improved the company’s cost competitiveness and quality of
power. The share of captive power in the company’s overall power consumption
has increased to 70% in CY2009 from 64% in CY2008 and is set to increase to
75% in CY2010. The company’s CPC increased to 346MW in CY2010. Over the

years, the company has improved its efficiency, owing to which its power
consumption/tonne of cement has declined.
Outlook and valuation
We expect ACC to register 8.3% CAGR in top-line over CY2010-12, aided by
capacity addition. However, bottom-line is expected to de-grow at a compounded
rate of 2.3% over the mentioned period due to higher operating costs. At current
levels, the stock is trading at an EV/EBITDA of 8.9x and EV/tonne of US $107
based on CY2012 estimates. We maintain our Neutral view on the stock.