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ACC's standalone performance for 4QCY11 was below our expectations, with EBITDA margin of 10.7% (v/s our estimate
of 15.2%), EBITDA of Rs2.09b (v/s our estimate of Rs3.02b) and adjusted PAT of Rs1.48b (v/s our estimate of Rs1.85b).
Key takeaways
Volumes grew 4.7% YoY (~16% QoQ) to 5.61mt (in-line). Realizations improved 2.9% QoQ (declined ~2.7% YoY) to
Rs3,490/ton (v/s our estimate of Rs3,550/ton). Net sales grew 2% YoY (~19.6% QoQ) to Rs19.6b (v/s our estimate
of Rs20b).
EBITDA grew 23% QoQ (declined ~56% YoY) to Rs2.09b (v/s our estimate of Rs3.02b) and EBITDA margin expanded
20bp QoQ (declined ~14.2pp YoY) to 10.7%, impacted by higher fixed cost in the form of staff cost (up 62% YoY;
26.6% QoQ) and other expenses (up 19.5% YoY; 31% QoQ). Recurring PAT declined 53% YoY (~59% QoQ) to
~Rs1.48b.
The company declared final dividend of Rs20.5/share including Rs7.5/share as special Platinum Jubilee dividend
(total of Rs30.5/share for CY10).
Valuation and view: We downgrade our EPS estimates by 8.4% for CY11 and by 6.9% for CY12 to factor in robust
pricing environment, which is more than negated by higher cost push. The stock is valued at 17.4x CY11E EPS, and an
EV of 9.1x CY11E EBITDA and US$111/ton (~30m ton capacity). Maintain Buy with a target price of Rs1,066 (~10x
CY11E EV/EBITDA).
Volume growth back after four quarters, but drop in realizations impacts
revenue
ACC returned to volume growth after four quarters, with growth of 4.7% YoY (~16%
QoQ) to 5.61m ton. Realizations improved by 2.7% YoY (~2.9% QoQ) to Rs3,490/ton.
Net sales grew just 2% YoY (~20% QoQ) to Rs19.6b. Volume growth was driven by
commissioning of its 3m ton brownfield expansion at Wadi. ACC Concrete, a 100%
subsidiary, reported 14.6% YoY growth in revenue to Rs1.59b.
Higher fixed cost restricts QoQ improvement in EBITDA
EBITDA grew 23% QoQ (declined ~56% YoY) to Rs2.09b (v/s our estimate of Rs3.02b)
and margin expanded 20bp QoQ (declined ~14.2pp YoY) to 10.7%, impacted by higher
fixed costs (staff cost and other expenses). Recurring PAT declined 53% YoY (~59%
QoQ) to ~Rs1.48b.
Staff cost was higher by 62% YoY and 26.6% QoQ due to increase in provisioning for
employee benefits (not quantified). Also, other expenses were higher by 19.5% YoY and
31% QoQ due to provisioning for obsolete inventory (~Rs250m for 4Q and Rs712m for
CY10). As expected, both energy (up 9% YoY; 7.5% QoQ) and freight cost (up 7% YoY;
14% QoQ) were higher due to higher coal prices, and increase in rail freight and tighter
adherence to ban on overloading.
In 4QCY10, ACC wrote back Rs644m provisioning related to sales tax subsidy and had
tax credit of Rs820m pertaining to prior years, which boosted reported PAT to Rs2.66b.
However, recurring PAT was Rs1.48b.
New capacities to contribute from 4QCY10
ACC commissioned its brownfield expansion at Orissa (~1.2m ton) in 2QCY10, which
has now stabilized. It commissioned its brownfield expansion at Karnataka (~3m ton) in
September 2010, which is yet to stabilize. Lastly, its 3m ton capacity at Maharashtra
would commence operations by 4QCY10. After several delays, these plants are expected
to stabilize and commission operations in 4QCY10. After two years of muted volume
growth, these new capacities are expected to drive robust volume growth of ~10% CAGR.
RMC business continues to drag consolidated PAT
ACC's RMC business, which was demerged into a 100% subsidiary from 1 January 2008,
continues to make PBIT loss. It made a loss of Rs56m in 4QCY10 (v/s Rs113m in 4QCY09
and Rs88m in 3QCY10). Aggressive investments were made to build the RMC business,
but slowdown in volumes has impacted profitability. The company has taken several
initiatives to turn around the business and focus is now on profitability rather than growth,
as reflected in deferring of all expansion plans.
Valuation and view
2HCY10 is believed to be the bottom-of-the-cycle period for the cement industry. Cement
prices are likely to be buoyant in 1HCY11, driven by recovery in demand. After three
years of muted growth, ACC would witness robust volume growth of ~10% CAGR over
the next two years, driven by new capacities. Allotment of coal blocks in Madhya Pradesh
(in JV with the state) and West Bengal (in consortium) offers option value in the long
term. The stock is valued at 17.4x CY11E EPS, and an EV of 9.1x CY11E EBITDA and
US$111/ton (~30m ton capacity). Maintain Buy, with a target price of Rs1,066 (~10x
CY11E EV/EBITDA)
Company description
ACC, part of the Holcim group, is the largest standalone
cement company in India, with total capacity of 30m ton. It
has a pan-India presence, with 16 plants. It is the oldest
player in the Indian cement industry, with ~10% market
share.
Key investment arguments
Market leader, with strong national presence and overall
market share of 10%.
High sensitivity to cement prices; every Re1/bag
increase in cement price would increase CY11E EPS
by 3.2%.
Focused on reducing power cost by setting up captive
power plants.
Key investment risks
Very limited scope to increase production through
blending, as 85% of cement sold is blended
Limited scope to saving cost, as location restricts usage
of imported coal to ~15%
Recent development
ACC has declared final dividend of Rs20.5/share
including Rs7.5/share as special Platinum Jubilee
dividend (total of Rs30.5/share for CY10).
Valuation and view
The stock is valued at 17.4x CY11E EPS, and an EV
of 9.1x CY11E EBITDA and US$111/ton (~30m ton
capacity).
Maintain Buy, with a target price of Rs1,066 (~10x
CY11E EV/EBITDA).
Sector view
Although sector would continue to be plagued by overcapacity
at least till Dec-11 and expect volatility in
cement prices and cement companies' performance
over next 6-9 months.
However, we believe we have already witnessed
bottom-of-the-cycle utilization & profitability, and it
should gradually improve hereon given sustainable
demand drivers.
Next 6-9 months to witnessed increased level of volatility
in cement prices
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ACC's standalone performance for 4QCY11 was below our expectations, with EBITDA margin of 10.7% (v/s our estimate
of 15.2%), EBITDA of Rs2.09b (v/s our estimate of Rs3.02b) and adjusted PAT of Rs1.48b (v/s our estimate of Rs1.85b).
Key takeaways
Volumes grew 4.7% YoY (~16% QoQ) to 5.61mt (in-line). Realizations improved 2.9% QoQ (declined ~2.7% YoY) to
Rs3,490/ton (v/s our estimate of Rs3,550/ton). Net sales grew 2% YoY (~19.6% QoQ) to Rs19.6b (v/s our estimate
of Rs20b).
EBITDA grew 23% QoQ (declined ~56% YoY) to Rs2.09b (v/s our estimate of Rs3.02b) and EBITDA margin expanded
20bp QoQ (declined ~14.2pp YoY) to 10.7%, impacted by higher fixed cost in the form of staff cost (up 62% YoY;
26.6% QoQ) and other expenses (up 19.5% YoY; 31% QoQ). Recurring PAT declined 53% YoY (~59% QoQ) to
~Rs1.48b.
The company declared final dividend of Rs20.5/share including Rs7.5/share as special Platinum Jubilee dividend
(total of Rs30.5/share for CY10).
Valuation and view: We downgrade our EPS estimates by 8.4% for CY11 and by 6.9% for CY12 to factor in robust
pricing environment, which is more than negated by higher cost push. The stock is valued at 17.4x CY11E EPS, and an
EV of 9.1x CY11E EBITDA and US$111/ton (~30m ton capacity). Maintain Buy with a target price of Rs1,066 (~10x
CY11E EV/EBITDA).
Volume growth back after four quarters, but drop in realizations impacts
revenue
ACC returned to volume growth after four quarters, with growth of 4.7% YoY (~16%
QoQ) to 5.61m ton. Realizations improved by 2.7% YoY (~2.9% QoQ) to Rs3,490/ton.
Net sales grew just 2% YoY (~20% QoQ) to Rs19.6b. Volume growth was driven by
commissioning of its 3m ton brownfield expansion at Wadi. ACC Concrete, a 100%
subsidiary, reported 14.6% YoY growth in revenue to Rs1.59b.
Higher fixed cost restricts QoQ improvement in EBITDA
EBITDA grew 23% QoQ (declined ~56% YoY) to Rs2.09b (v/s our estimate of Rs3.02b)
and margin expanded 20bp QoQ (declined ~14.2pp YoY) to 10.7%, impacted by higher
fixed costs (staff cost and other expenses). Recurring PAT declined 53% YoY (~59%
QoQ) to ~Rs1.48b.
Staff cost was higher by 62% YoY and 26.6% QoQ due to increase in provisioning for
employee benefits (not quantified). Also, other expenses were higher by 19.5% YoY and
31% QoQ due to provisioning for obsolete inventory (~Rs250m for 4Q and Rs712m for
CY10). As expected, both energy (up 9% YoY; 7.5% QoQ) and freight cost (up 7% YoY;
14% QoQ) were higher due to higher coal prices, and increase in rail freight and tighter
adherence to ban on overloading.
In 4QCY10, ACC wrote back Rs644m provisioning related to sales tax subsidy and had
tax credit of Rs820m pertaining to prior years, which boosted reported PAT to Rs2.66b.
However, recurring PAT was Rs1.48b.
New capacities to contribute from 4QCY10
ACC commissioned its brownfield expansion at Orissa (~1.2m ton) in 2QCY10, which
has now stabilized. It commissioned its brownfield expansion at Karnataka (~3m ton) in
September 2010, which is yet to stabilize. Lastly, its 3m ton capacity at Maharashtra
would commence operations by 4QCY10. After several delays, these plants are expected
to stabilize and commission operations in 4QCY10. After two years of muted volume
growth, these new capacities are expected to drive robust volume growth of ~10% CAGR.
RMC business continues to drag consolidated PAT
ACC's RMC business, which was demerged into a 100% subsidiary from 1 January 2008,
continues to make PBIT loss. It made a loss of Rs56m in 4QCY10 (v/s Rs113m in 4QCY09
and Rs88m in 3QCY10). Aggressive investments were made to build the RMC business,
but slowdown in volumes has impacted profitability. The company has taken several
initiatives to turn around the business and focus is now on profitability rather than growth,
as reflected in deferring of all expansion plans.
Valuation and view
2HCY10 is believed to be the bottom-of-the-cycle period for the cement industry. Cement
prices are likely to be buoyant in 1HCY11, driven by recovery in demand. After three
years of muted growth, ACC would witness robust volume growth of ~10% CAGR over
the next two years, driven by new capacities. Allotment of coal blocks in Madhya Pradesh
(in JV with the state) and West Bengal (in consortium) offers option value in the long
term. The stock is valued at 17.4x CY11E EPS, and an EV of 9.1x CY11E EBITDA and
US$111/ton (~30m ton capacity). Maintain Buy, with a target price of Rs1,066 (~10x
CY11E EV/EBITDA)
Company description
ACC, part of the Holcim group, is the largest standalone
cement company in India, with total capacity of 30m ton. It
has a pan-India presence, with 16 plants. It is the oldest
player in the Indian cement industry, with ~10% market
share.
Key investment arguments
Market leader, with strong national presence and overall
market share of 10%.
High sensitivity to cement prices; every Re1/bag
increase in cement price would increase CY11E EPS
by 3.2%.
Focused on reducing power cost by setting up captive
power plants.
Key investment risks
Very limited scope to increase production through
blending, as 85% of cement sold is blended
Limited scope to saving cost, as location restricts usage
of imported coal to ~15%
Recent development
ACC has declared final dividend of Rs20.5/share
including Rs7.5/share as special Platinum Jubilee
dividend (total of Rs30.5/share for CY10).
Valuation and view
The stock is valued at 17.4x CY11E EPS, and an EV
of 9.1x CY11E EBITDA and US$111/ton (~30m ton
capacity).
Maintain Buy, with a target price of Rs1,066 (~10x
CY11E EV/EBITDA).
Sector view
Although sector would continue to be plagued by overcapacity
at least till Dec-11 and expect volatility in
cement prices and cement companies' performance
over next 6-9 months.
However, we believe we have already witnessed
bottom-of-the-cycle utilization & profitability, and it
should gradually improve hereon given sustainable
demand drivers.
Next 6-9 months to witnessed increased level of volatility
in cement prices
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