Emkay: ACC- Results disappoint- Cost pressures increase : Target: Rs 1,035

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ACC

Results disappoint- Cost pressures increase

ACCUMULATE

CMP: Rs 986                                       Target Price: Rs 1,035

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n     APAT at Rs1.8bn (-47%yoy) sharply below est of Rs2.6bn led by lower realizations & higher RM & staff costs. Revenue up 1.9% yoy - volumes +4.7%yoy, realizations down 2.7% yoy

n     Costs increases drag EBITDA to Rs2.8bn (-43%yoy). EBITDA/t at Rs499 (-45%yoy). Key negative surprises -RM cost/t (+18%qoq), staff cost(+27%qoq) & OE(+15%qoq)

n     Downgrade CY11 earnings by 16.7%. Cement offtake improves in Jan. Prices hiked across regions. Sustainability remains uncertain, as demand yet to see significant pick up

n     Valuation at PER of 16.6X& EV/ton of USD112, though not cheap, looks reasonable considering ACC’s CY11E RoCE of ~21.2% & FCF of Rs77/share. Maintain ACCUMULATE

Revenue up 1.9% yoy- volumes +4.7%, realizations down 2.7%

ACC’s Q4CY11 revenues grew 1.9% yoy (19.6% qoq) to Rs19.58 bn – below estimates

of Rs20.22 bn – on account of lower cement realizations. Volumes grew 4.7% yoy

(15.5% qoq) to 5.6 mt. Realizations though down 2.7% yoy (Rs 3508/t), improved by

2.9% sequentially as ACC’s key Southern and western markets witnessed price hikes.

Increasing costs drag EBIDTA down by 43%- below estimates

With continued cost pressures on account of higher RM, Energy & freight cost, ACC’s

Q4CY11 EBIDTA at Rs2.8 bn declined by 43%yoy, sharply lower than our estimates

(Rs4.17 bn). EBITDA/t at Rs499/t declined 45% yoy, however up 42% qoq with EBITDA

margins contracting 1120bps yoy at 14.3%.

Key Variable costs up 13% qoq

With sharp increase in coal prices, fly ash cost & higher freight charges, ACC’s key

variable cost at Rs2013/t increased 12.8% qoq. We remain concerned on cost pressure

as the recent sharp increase in international coal prices is yet to reflect in the P&F costs.

P&F costs would increase further lead by Coal India’s planned price hike for linkage

coal (expected somewhere in Q2CY11)

Key costs that negatively surprised us are

n RM cost at Rs611/t (+18.4% qoq)- due to higher clinker purchases, higher fly ash

and gypsum costs

n Staff costs at Rs1.48bn (+26.6% qoq) due to increased provisioning for employee

benefits

n Other expenditure (which are largely fixed exp) at ~ Rs5 bn up 14.9% qoq

APAT at Rs1.81 bn down 47% yoy

ACC’s pre-exceptional net profit at Rs1.81 bn declined by 47% yoy. Reported profits at

Rs2.56 bn includes Rs644 mn of write back of provisions, Rs820 mn of tax expenses

credit relating to earlier years and an extraordinary expense of Rs71.16 of provision

made for spare part obsolescence.

Capex plans update

Chanda plant commissioned – capacity now at 30 mntpa

A 25 MW captive power plant was commissioned at Wadi in October 2010 while a second

unit also of 25 MW is scheduled to be completed in Q1CY11. The new clinkering line of

capacity 7000 tonnes per day at Chanda in Maharashtra commenced trial production in

November 2010, which would result in additional cement capacity of about 3mtpa.the unit

will ramp up production in H1CY11. The project also included a captive power plant of

25MW capacity which has also been commissioned this quarter and would enable Chanda

to meet its entire power requirement. With the commissioning of these projects at Wadi and

Chanda , the total installed capacity of ACC has now increased to about 30 mnt per annum.

Cement prices hiked Rs15-20/bag in Jan- Feb

Helped by improvement in cement offtake and season logistical bottleneck (Wagon

shortage due to diversion of wagons to food grains & other crop) cement prices have

witnessed a series of hikes ( Rs8-10/bag in January and a Rs10/bag hike in February)

across all regions. With recent price hikes taken by cement producer across the country, we

estimate average cement prices have reached ~Rs240-245/bag. Our CY11E numbers for

ACC (EPS of Rs59.3) are modeled at Rs242/bag.

Downgrade FY11E Earnings

On account of increasing input & other costs, we are downgrading our earnings estimates

for ACC by 16.7% for CY11 (EPS of Rs59.3). We are introducing CY12 estimates with EPS

of Rs68.7.

Maintain ACCUMULATE

Though cement prices have been hiked across all regions, we continue to believe that

sustainability of cement prices remains uncertain in medium/long term as the cement

demand growth FY11YTD ~5% has now emerged as bigger concern than the overcapacity

in the system. ACC’s at PER of 16.6X, 9.1X EV/EBITDA and EV/ton of USD112 on CY11

numbers, though not cheap, looks reasonable considering that ACC’s would still generate

CY11E RoCE of ~21.2% (close to 1.4X cost of capital). ACC’s free cash generation of

Rs77/share and cash & cash equivalents of Rs198/share for CY11 could further provide

downside support to the stock. Maintain ACCUMULATE with price target of Rs1035.