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ACC Limited
Underweight ACC.BO, ACC IN
Cost pressures continue to surprise on the upside
• Similar to ACEM, results below estimates on higher costs: Similar to
ACEM, ACC has a December year end and hence we think one should focus
more on the EBITDA line (ACC had a negative tax rate in Q4). EBITDA at
Rs3.4bn was below our (Rs4.4bn) and Bloomberg consensus estimates of
Rs4.22bn. While volumes and ASP were in line with estimates (3% increase
q/q), all around cost pressures have hit profitability. Raw material costs/MT
were +19% q/q, power and fuel costs/MT were +8% q/q, and freight costs were
+15% q/q. EBITDA/MT as a result was at Rs608/MT, which while up 33%
from the depressed levels of Sept-10 quarter was 46% below June-10 levels.
While coal costs have been well flagged as a key inflationary item, freight and
raw material costs have also been increasing. EBITDA margins stood at 16.3%.
We found the higher dividend payout interesting (~52% for CY10).
• Capacities commissioned across Chanda and Wadi: ACC has commissioned
the Chanda clinker capacity and also the New Wadi capacity (at 12,500 is the
largest cement kiln as per the company), taking total capacity to 30MT. No new
expansion has been announced.
• Tough times ahead for the sector, as demand weakens, cost pressures build
and there is a surplus capacity: As results across the sector come through, we
see cost pressures as likely surprising on the upside as all around cost inflation
hits the sector. Weak demand is likely to limit the industry's ability to pass on
the cost increases. We cut our CY11 EBITDA estimate by 12% and our
CY11 PAT estimate by 15%.
• Post a 12% stock price correction, valuation premium still high, in our
view: ACC has corrected by 12% from its recent peak. However, valuations at
$133/MT EV/MT CY11E and 10.5x EV/EBITDA are still at a premium to
UTCEM vs. $118/MT and 8.1x FY12E. We continue to believe this premium is
not warranted and reiterate our UW rating on ACC with a revised Mar-12 PT of
Rs830 (from Sep-11 PT of Rs750) based on $110/MT CY12E EV/MT. Our PT
translates into EV/EBITDA multiples of 8.8x and 7.7x on CY11E and CY12E,
respectively. Key risks to our PT and estimates are a sharp recovery in cement
demand and prices.
Higher costs hurt 4Q results
ACC reported a weak 4QCY10 EBITDA of Rs3.4bn, which was below our
(Rs4.4bn) and consensus estimates of Rs4.22bn. Volumes and realizations were
strong as expected (sales +16% q/q; ASPs +7% q/q). Realizations were aided by the
particularly sharp price hikes taken in the Southern India markets over Nov-Dec.
However, this growth was more or less offset by the significant cost pressures. Raw
material/MT increased 19% q/q due to higher clinker purchases and an increase in fly
ash and gypsum costs. Freight cost/MT also increased by 15% q/q. As expected,
higher coal costs led to power & fuel costs increasing by 8% sequentially. While
EBITDA/MT improved from the poor levels of Sep-10 to Rs608/MT (from
Rs458/MT in Sep-10), it still remains below the 1HCY10 levels. We expect the
current cost pressures to sustain over the next few quarters.
Industry view- While headline capacity additions have
peaked, ramp up has not; anemic demand a key concern
We do not see large capacity additions over the next two years and believe capacity
additions in the industry have peaked for the time being. Having said this, utilization
levels at many of the new plants is significantly below industry utilization levels of
75-80% and, in our view, ramp up of these capacities is yet to take place. However,
the key concern is the anemic state of demand. Indian cement consumption of 10%
CAGR over FY06-10 was driven by large mega projects in key states like urban
housing in Gurgaon, a new airport and Commonwealth games spending in Delhi, and
housing projects in UP. Private and public spending drove demand in key South
India states of AP and TN. All these states currently do not have any large capex
projects and we see downside risks to our FY12E cement demand growth of 9%.
Cement prices, in our view, are likely to remain choppy, resulting in sharp earnings
volatility. We believe sustained industry earnings power is likely post cap utilization
of 85%+.
Valuation and risks to rating
ACC has corrected by 12% from its recent peak. However, valuations at $133/MT
EV/MT CY11E and 10.5x EV/EBITDA is still at a premium to UTCEM vs.
$118/MT and 8.1x FY12E. We continue to believe this premium is not warranted
and reiterate our UW rating on ACC with a revised Marh-12 PT of Rs830 based on
$110/MT CY12E EV/MT. We increase our target multiple as most of the capacity
addition in the industry is completed. Our PT translates into EV/EBITDA multiples
of 8.8x and 7.7x on CY11E and 12E, respectively. Key risks to our PT and estimates
are a sharp recovery in cement demand and prices.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ACC Limited
Underweight ACC.BO, ACC IN
Cost pressures continue to surprise on the upside
• Similar to ACEM, results below estimates on higher costs: Similar to
ACEM, ACC has a December year end and hence we think one should focus
more on the EBITDA line (ACC had a negative tax rate in Q4). EBITDA at
Rs3.4bn was below our (Rs4.4bn) and Bloomberg consensus estimates of
Rs4.22bn. While volumes and ASP were in line with estimates (3% increase
q/q), all around cost pressures have hit profitability. Raw material costs/MT
were +19% q/q, power and fuel costs/MT were +8% q/q, and freight costs were
+15% q/q. EBITDA/MT as a result was at Rs608/MT, which while up 33%
from the depressed levels of Sept-10 quarter was 46% below June-10 levels.
While coal costs have been well flagged as a key inflationary item, freight and
raw material costs have also been increasing. EBITDA margins stood at 16.3%.
We found the higher dividend payout interesting (~52% for CY10).
• Capacities commissioned across Chanda and Wadi: ACC has commissioned
the Chanda clinker capacity and also the New Wadi capacity (at 12,500 is the
largest cement kiln as per the company), taking total capacity to 30MT. No new
expansion has been announced.
• Tough times ahead for the sector, as demand weakens, cost pressures build
and there is a surplus capacity: As results across the sector come through, we
see cost pressures as likely surprising on the upside as all around cost inflation
hits the sector. Weak demand is likely to limit the industry's ability to pass on
the cost increases. We cut our CY11 EBITDA estimate by 12% and our
CY11 PAT estimate by 15%.
• Post a 12% stock price correction, valuation premium still high, in our
view: ACC has corrected by 12% from its recent peak. However, valuations at
$133/MT EV/MT CY11E and 10.5x EV/EBITDA are still at a premium to
UTCEM vs. $118/MT and 8.1x FY12E. We continue to believe this premium is
not warranted and reiterate our UW rating on ACC with a revised Mar-12 PT of
Rs830 (from Sep-11 PT of Rs750) based on $110/MT CY12E EV/MT. Our PT
translates into EV/EBITDA multiples of 8.8x and 7.7x on CY11E and CY12E,
respectively. Key risks to our PT and estimates are a sharp recovery in cement
demand and prices.
Higher costs hurt 4Q results
ACC reported a weak 4QCY10 EBITDA of Rs3.4bn, which was below our
(Rs4.4bn) and consensus estimates of Rs4.22bn. Volumes and realizations were
strong as expected (sales +16% q/q; ASPs +7% q/q). Realizations were aided by the
particularly sharp price hikes taken in the Southern India markets over Nov-Dec.
However, this growth was more or less offset by the significant cost pressures. Raw
material/MT increased 19% q/q due to higher clinker purchases and an increase in fly
ash and gypsum costs. Freight cost/MT also increased by 15% q/q. As expected,
higher coal costs led to power & fuel costs increasing by 8% sequentially. While
EBITDA/MT improved from the poor levels of Sep-10 to Rs608/MT (from
Rs458/MT in Sep-10), it still remains below the 1HCY10 levels. We expect the
current cost pressures to sustain over the next few quarters.
Industry view- While headline capacity additions have
peaked, ramp up has not; anemic demand a key concern
We do not see large capacity additions over the next two years and believe capacity
additions in the industry have peaked for the time being. Having said this, utilization
levels at many of the new plants is significantly below industry utilization levels of
75-80% and, in our view, ramp up of these capacities is yet to take place. However,
the key concern is the anemic state of demand. Indian cement consumption of 10%
CAGR over FY06-10 was driven by large mega projects in key states like urban
housing in Gurgaon, a new airport and Commonwealth games spending in Delhi, and
housing projects in UP. Private and public spending drove demand in key South
India states of AP and TN. All these states currently do not have any large capex
projects and we see downside risks to our FY12E cement demand growth of 9%.
Cement prices, in our view, are likely to remain choppy, resulting in sharp earnings
volatility. We believe sustained industry earnings power is likely post cap utilization
of 85%+.
Valuation and risks to rating
ACC has corrected by 12% from its recent peak. However, valuations at $133/MT
EV/MT CY11E and 10.5x EV/EBITDA is still at a premium to UTCEM vs.
$118/MT and 8.1x FY12E. We continue to believe this premium is not warranted
and reiterate our UW rating on ACC with a revised Marh-12 PT of Rs830 based on
$110/MT CY12E EV/MT. We increase our target multiple as most of the capacity
addition in the industry is completed. Our PT translates into EV/EBITDA multiples
of 8.8x and 7.7x on CY11E and 12E, respectively. Key risks to our PT and estimates
are a sharp recovery in cement demand and prices.
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