Reduce ACC -Results disappoint : Edelweiss

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�� Operating performance below estimate; PAT higher due to one offs
Though ACC’s revenue, at INR 19.6 bn, was in line with estimate, the INR 2.9 bn
EBITDA (adjusted to one-time provision in other expenditure of INR 712 mn on
account of change in the basis for identifying obsolescence of spare parts) was
below our estimate of INR 3.49 bn due to increase in operating costs. Despite a
23% Q-o-Q increase in depreciation, reported PAT at INR 2.56 bn was higher
than our estimate of INR 2.27 bn due to one-off adjustments related to: (a)
other operating income of INR 644 mn arising due to write back in provisioning
of sales tax subsidy in earlier years; and (b) tax credit of INR 820 mn related to
earlier years.

�� Realisations increase 2.9% Q-o-Q
Realisations, at INR 3,490 per tonne, increased 2.9% Q-o-Q, in line with our
estimate, mainly due to ACC’s ~16% sales exposure in South (where average
cement prices increased sequentially by over 25% Q-o-Q). Cement volumes
jumped 16.1% Q-o-Q and 4.7% Y-o-Y at 5.61 mt for the quarter.
�� Higher-than-estimated costs impact margins
Power & fuel cost per tonne, at INR 804, increased ~7% Q-o-Q. Freight cost per
tonne rose 14% Q-o-Q and with rail freight being revised upwards by 4% w.e.f.
27th Dec, 2010, it will increase further. While employee cost, at INR 1.5 bn,
increased 27% Q-o-Q due to higher provisioning, adjusted other expenditure too
increased 31% Q-o-Q in absolute terms to INR 4.96 bn. EBITDA/tonne was INR
517 compared to our estimate of INR 645. Sequentially, EBITDA per tonne
increased 56% while on a Y-o-Y basis, it declined by 36%.
�� Expansion update
ACC has commenced trial production at the 3 mtpa plant in Chanda (Maharashtra)
and will ramp up production progressively in H1CY11. The second unit of 25 MW of
CPP at Wadi (Karnataka) is estimated to be commissioned in Q1CY11.
�� Outlook and valuations: Subdued industry outlook; maintain ‘REDUCE’
Though in the near term (owing to the peak season demand), cement prices
across regions may remain firm, we expect sharp declines in the lean season.
With sector fundamentals estimated to remain weak over the next two years,
current valuations of USD 123 EV/tonne and 9.2x EV/EBITDA CY11 estimates
appear expensive. We maintain our ‘REDUCE’ recommendation on the stock
with ‘Sector Performer’ rating.


�� Company Description
ACC is the second largest cement manufacturer in the country with current installed
capacity of ~27 mn tpa, which will increase to 30 mn tpa by Q1CY11E. The company is a
pan India player with 12 plants spread across the country. Holcim, through its private
subsidiary ACIL, holds ~48.2% stake in the company and is at the helm of the day-today
affairs of the company.
�� Investment Theme
ACC is a pan India player with geographic mix of 24% in North, 15% in West, 20% in
East and 16% in South. We expect a CAGR decline of 9% in EBITDA/tonne and 5% in
PAT over the next two years. With current valuations appearing expensive, we
downgrade the stock to Reduce.
�� Key Risks
Prices increase higher than our estimates.
Cement demand grows higher than our estimates.
Power and fuel cost decline significantly.