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Associated Cement Companies
Difficult times
„4Q CY10 disappoints; maintain underperform
ACC posted 4Q CY10 EBITDA of Rs2.1bn, down 53% YoY and up 24% QoQ.
Results were significantly below our expectations due to 1) sharply higher freight
costs reflecting higher lead-distances post Wadi expansion, 2) hike in cost of
state-grid power in Himachal Pradesh, and 2) higher employee costs (partly onetime). We think cost pressures are unlikely to ease materially; this coupled with
expected weakness in cement prices drives our Underperform rating on ACC.
CY11E earnings cut sharply
We have lowered our CY11-EBITDA estimate for ACC by 26% primarily due to
rising energy & freight costs; ACC sources ~50% of its coal requirements from
open-mkt/imports. Higher costs coupled with weak cement prices drive a forecast
34% YoY fall in CY11 earnings. Note that in its 4Q press release, ACC cautions
that pressure on selling prices may continue in the near-term. Updating for CY10
balance-sheet, our EV/capacity based PO has been tweaked up to Rs800/sh due
to lower net debt vs earlier.
Wadi expansion commissioned; Chanda unit time-line slips
Alongwith 4Q results, ACC reported that its Wadi expansion (3.5mn tpa) was
commissioned in Sep ’10. ACC’s 3mn tpa expansion at Chanda is expected to
commission in 1H CY11 vs end-CY10 expected earlier.
Expectations of ACC-Ambuja merger remain strong
There have been growing market expectations of a merger between Ambuja and
ACC. Holcim’s stake in both entities is similar (48% in ACC & 46% in Ambuja). A
merger could yield synergies in administration and distribution costs but saving in
marketing costs look difficult unless the brands are rolled into a single one.
Price objective basis & risk
Assoc. Cement (ADCLF)
We have a price objective of Rs800/sh for ACC. We value the company at a
CY11E EV/capacity of around US$95/ton based on a 20-25% discount versus the
industry's current replacement cost of US$120-125/ton. Trough discount vs
replacement cost was steeper at 40-45% in the previous cycle but structurally
improved RoEs and significantly healthier balance sheets may warrant lower
discount levels in the current cycle. The 20-25% discount is in line with the
average (rather than trough) discount witnessed through the previous downturn
(1997-2002). Downside risk to our PO stems from continued rise in energy prices.
Upside possibilities stem from rational pricing by producers and unforeseen
easing in energy prices especially coal.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Associated Cement Companies
Difficult times
„4Q CY10 disappoints; maintain underperform
ACC posted 4Q CY10 EBITDA of Rs2.1bn, down 53% YoY and up 24% QoQ.
Results were significantly below our expectations due to 1) sharply higher freight
costs reflecting higher lead-distances post Wadi expansion, 2) hike in cost of
state-grid power in Himachal Pradesh, and 2) higher employee costs (partly onetime). We think cost pressures are unlikely to ease materially; this coupled with
expected weakness in cement prices drives our Underperform rating on ACC.
CY11E earnings cut sharply
We have lowered our CY11-EBITDA estimate for ACC by 26% primarily due to
rising energy & freight costs; ACC sources ~50% of its coal requirements from
open-mkt/imports. Higher costs coupled with weak cement prices drive a forecast
34% YoY fall in CY11 earnings. Note that in its 4Q press release, ACC cautions
that pressure on selling prices may continue in the near-term. Updating for CY10
balance-sheet, our EV/capacity based PO has been tweaked up to Rs800/sh due
to lower net debt vs earlier.
Wadi expansion commissioned; Chanda unit time-line slips
Alongwith 4Q results, ACC reported that its Wadi expansion (3.5mn tpa) was
commissioned in Sep ’10. ACC’s 3mn tpa expansion at Chanda is expected to
commission in 1H CY11 vs end-CY10 expected earlier.
Expectations of ACC-Ambuja merger remain strong
There have been growing market expectations of a merger between Ambuja and
ACC. Holcim’s stake in both entities is similar (48% in ACC & 46% in Ambuja). A
merger could yield synergies in administration and distribution costs but saving in
marketing costs look difficult unless the brands are rolled into a single one.
Price objective basis & risk
Assoc. Cement (ADCLF)
We have a price objective of Rs800/sh for ACC. We value the company at a
CY11E EV/capacity of around US$95/ton based on a 20-25% discount versus the
industry's current replacement cost of US$120-125/ton. Trough discount vs
replacement cost was steeper at 40-45% in the previous cycle but structurally
improved RoEs and significantly healthier balance sheets may warrant lower
discount levels in the current cycle. The 20-25% discount is in line with the
average (rather than trough) discount witnessed through the previous downturn
(1997-2002). Downside risk to our PO stems from continued rise in energy prices.
Upside possibilities stem from rational pricing by producers and unforeseen
easing in energy prices especially coal.
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