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EARNINGS REVIEW
ACC (ACC.BO)
Sell Equity Research
Below expectations; margin recovery muted, rich valuations
What surprised us
ACC reported 4QCY10 net income of Rs2,559 mn (down 9% yoy but up 156%
qoq), 8% above our expectations due to a Rs820 mn tax credit for CY10. At
the operating level, EBITDA of Rs3.4 bn was 18% below our estimates and
Reuters consensus. For 4Q10, top line of Rs19.6 bn (up 16% qoq but down
1% yoy) came in 4% below our estimates, primarily due to lower-thanexpected average realizations. Higher raw material costs (increased
purchases of clinker and a surge in input prices such as slag), employee
costs (increased provisioning for retiral benefits), and higher power costs led
to a sharp margin compression – EBITDA/ton stood at Rs607 (GSe: Rs740)
vs. Rs943 in 4QCY09. For CY2010, the company reported EBITDA of Rs18.1
bn, down 31% yoy and 6% below our expectations on lower realizations, flat
volumes (-1% yoy), and higher costs.
What to do with the stock
Given a surge in cement prices that began in Sep 2010, we had expected a
significant pickup in average realizations and EBITDA/ton for ACC for 4Q, but are
disappointed by the results. With new capacities commissioned in the south, we
believe ACC’s overall sales mix is likely to see a shift with higher proportion
from the south, which is still reeling from excess capacity and low utilizations.
Current valuations seem to belie the fact that cost pressures appear to be sticky,
giving little indication for a sharp margin recovery, in our view. At 130% EV/RC,
the stock is trading above mid-cycle valuations of 100% EV/RC. We reiterate our
Sell rating (on CL); we raise our 12-m EV/RC-based TP to Rs757 (from Rs728) on
lower net debt reported for CY10, implying 23% downside. We cut our
CY11E/12E EPS estimates by 1%/3% to account for lower volumes and higher
costs. Key risks include faster-than-expected price recovery
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
EARNINGS REVIEW
ACC (ACC.BO)
Sell Equity Research
Below expectations; margin recovery muted, rich valuations
What surprised us
ACC reported 4QCY10 net income of Rs2,559 mn (down 9% yoy but up 156%
qoq), 8% above our expectations due to a Rs820 mn tax credit for CY10. At
the operating level, EBITDA of Rs3.4 bn was 18% below our estimates and
Reuters consensus. For 4Q10, top line of Rs19.6 bn (up 16% qoq but down
1% yoy) came in 4% below our estimates, primarily due to lower-thanexpected average realizations. Higher raw material costs (increased
purchases of clinker and a surge in input prices such as slag), employee
costs (increased provisioning for retiral benefits), and higher power costs led
to a sharp margin compression – EBITDA/ton stood at Rs607 (GSe: Rs740)
vs. Rs943 in 4QCY09. For CY2010, the company reported EBITDA of Rs18.1
bn, down 31% yoy and 6% below our expectations on lower realizations, flat
volumes (-1% yoy), and higher costs.
What to do with the stock
Given a surge in cement prices that began in Sep 2010, we had expected a
significant pickup in average realizations and EBITDA/ton for ACC for 4Q, but are
disappointed by the results. With new capacities commissioned in the south, we
believe ACC’s overall sales mix is likely to see a shift with higher proportion
from the south, which is still reeling from excess capacity and low utilizations.
Current valuations seem to belie the fact that cost pressures appear to be sticky,
giving little indication for a sharp margin recovery, in our view. At 130% EV/RC,
the stock is trading above mid-cycle valuations of 100% EV/RC. We reiterate our
Sell rating (on CL); we raise our 12-m EV/RC-based TP to Rs757 (from Rs728) on
lower net debt reported for CY10, implying 23% downside. We cut our
CY11E/12E EPS estimates by 1%/3% to account for lower volumes and higher
costs. Key risks include faster-than-expected price recovery
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