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ACC (ACC)
Cement
Limited respite. ACC reported a marginal improvement in profitability (270 bps) from
the historic lows of the previous quarter. Higher input costs, including provisions for
obsolete spares, offset the 3% qoq increase in realizations. We continue to maintain
our conservative stance on ACC, as the current valuations do not take cognizance of
price weakness in ACC’s key markets of North and Central India. We downgrade to SELL and
revise our target price to Rs920/share, implying an EV/ton of US$127 on CY2011E production.
Margins remain weak—recover 270 bps despite higher volumes and price increases
ACC reported net sales of Rs19.6 bn (2% yoy, 20% qoq), operating profit of Rs2.6 bn (-41% yoy,
51% qoq) and net income of Rs1.6 bn (-44% yoy, 57% qoq) against our estimate of Rs19.4 bn,
Rs3.1 bn and Rs1.9 bn, respectively. Lower-than-estimated EBITDA was primarily on account of (1)
one-time provisioning of Rs711 mn (including Rs474 mn pertaining to CY2009) as ACC changed
its policy of identifying obsolescence of spare parts. Volumes at 5.6 mn tons (5% yoy, 16% qoq)
and average realization at Rs3,490/ton (-3% yoy, 3% qoq) were in line with our estimates of 5.5
mn tons and Rs3,548/ton.
Reported net income includes (1) Rs644 mn of write-back of prior-period provisions, (2) tax credit
of Rs820 mn pertaining to earlier years, and (3) provisions for obsolete spares of Rs474 mn. We
discuss key highlights of the result in the subsequent section.
Pricing in Central India continues to remain weak
Cement prices in ACC’s key markets (North and Central) trended downwards during the quarter,
declining by Rs2-6/bag sequentially. Sedate demand environment did not allow for the price
increases taken in October to sustain through the quarter as volume growth remains muted for
the industry (4.3% YTD). In our view, subdued demand growth along with supply overhang will
likely continue to put downward pressure on cement prices.
Downgrade to SELL with a revised target price of Rs920/share
We downgrade ACC to SELL with a revised target price of Rs920/share. Our target price
implies an EV/ton of US$127/ton on CY2011E production and EV/EBITDA of 6.5X on
CY2011E earnings. ACC is currently trading at an EV/EBITDA of 7X CY2011E EBITDA and EV/ton
of US$138/ton on CY2011E production. We have revised our EPS estimates to Rs54/share
(previously Rs64/share) in CY2011E and Rs68/share (previously Rs78/share) in CY2012E as we
account for lower volumes and increased input cost.
Key highlights of 4QCY10 results
Volumes – ACC’s volumes during 4QCY10 improved to 5.6 mn tons (5% yoy, 16% qoq)
driven by strong growth in October which tapered off in later months following the
general industry trend. We note that 4QCY10 was the first quarter of positive volume
growth for ACC since 4QCY09 (see Exhibit 2), driven primarily by effect of 2.8 mtpa of
incremental capacities in Karnataka (commissioned in 1HCY10).
Realizations – realizations improved marginally by Rs100/ton to Rs3,490/ton in 4QCY10.
Negligible improvement in realization was primarily driven by weakness in ACC’s key
market of North and Central India. Average cement prices in North declined marginally
from Rs236/bag in 3QCY10 to Rs234/bag in 4QCY10 while prices in Central declined
from Rs224/bag in 3QCY10 to Rs218/bag in 4QCY10.
Power and fuel cost – power and fuel cost increased to Rs804/ton (9% yoy, 7% qoq).
We note that ACC with relatively lesser dependence on imported coal (~15%) is betterplaced
than peers in an environment of surging prices of imported coal.
Other expenditure includes one-time provisioning of Rs236 mn as ACC changed its
policy of identifying obsolescence of spare parts.
Balance sheet analysis for CY2010
ACC incurred a capex of Rs7.2 bn during CY2010, most of which was done in 1HCY10
(Rs4.9 bn) as ACC commissioned 3 mtpa of clinker unit at Wadi along with a captive power
plant of 25 MW. Total debt reduced from Rs5.7 bn as of December 2009 to Rs5.2 bn as of
December 2010, implying a net cash balance of Rs5.6 bn.
We note that ACC commenced trial runs of it clinker unit at Chanda which also includes a
captive power plant of 25 MW.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ACC (ACC)
Cement
Limited respite. ACC reported a marginal improvement in profitability (270 bps) from
the historic lows of the previous quarter. Higher input costs, including provisions for
obsolete spares, offset the 3% qoq increase in realizations. We continue to maintain
our conservative stance on ACC, as the current valuations do not take cognizance of
price weakness in ACC’s key markets of North and Central India. We downgrade to SELL and
revise our target price to Rs920/share, implying an EV/ton of US$127 on CY2011E production.
Margins remain weak—recover 270 bps despite higher volumes and price increases
ACC reported net sales of Rs19.6 bn (2% yoy, 20% qoq), operating profit of Rs2.6 bn (-41% yoy,
51% qoq) and net income of Rs1.6 bn (-44% yoy, 57% qoq) against our estimate of Rs19.4 bn,
Rs3.1 bn and Rs1.9 bn, respectively. Lower-than-estimated EBITDA was primarily on account of (1)
one-time provisioning of Rs711 mn (including Rs474 mn pertaining to CY2009) as ACC changed
its policy of identifying obsolescence of spare parts. Volumes at 5.6 mn tons (5% yoy, 16% qoq)
and average realization at Rs3,490/ton (-3% yoy, 3% qoq) were in line with our estimates of 5.5
mn tons and Rs3,548/ton.
Reported net income includes (1) Rs644 mn of write-back of prior-period provisions, (2) tax credit
of Rs820 mn pertaining to earlier years, and (3) provisions for obsolete spares of Rs474 mn. We
discuss key highlights of the result in the subsequent section.
Pricing in Central India continues to remain weak
Cement prices in ACC’s key markets (North and Central) trended downwards during the quarter,
declining by Rs2-6/bag sequentially. Sedate demand environment did not allow for the price
increases taken in October to sustain through the quarter as volume growth remains muted for
the industry (4.3% YTD). In our view, subdued demand growth along with supply overhang will
likely continue to put downward pressure on cement prices.
Downgrade to SELL with a revised target price of Rs920/share
We downgrade ACC to SELL with a revised target price of Rs920/share. Our target price
implies an EV/ton of US$127/ton on CY2011E production and EV/EBITDA of 6.5X on
CY2011E earnings. ACC is currently trading at an EV/EBITDA of 7X CY2011E EBITDA and EV/ton
of US$138/ton on CY2011E production. We have revised our EPS estimates to Rs54/share
(previously Rs64/share) in CY2011E and Rs68/share (previously Rs78/share) in CY2012E as we
account for lower volumes and increased input cost.
Key highlights of 4QCY10 results
Volumes – ACC’s volumes during 4QCY10 improved to 5.6 mn tons (5% yoy, 16% qoq)
driven by strong growth in October which tapered off in later months following the
general industry trend. We note that 4QCY10 was the first quarter of positive volume
growth for ACC since 4QCY09 (see Exhibit 2), driven primarily by effect of 2.8 mtpa of
incremental capacities in Karnataka (commissioned in 1HCY10).
Realizations – realizations improved marginally by Rs100/ton to Rs3,490/ton in 4QCY10.
Negligible improvement in realization was primarily driven by weakness in ACC’s key
market of North and Central India. Average cement prices in North declined marginally
from Rs236/bag in 3QCY10 to Rs234/bag in 4QCY10 while prices in Central declined
from Rs224/bag in 3QCY10 to Rs218/bag in 4QCY10.
Power and fuel cost – power and fuel cost increased to Rs804/ton (9% yoy, 7% qoq).
We note that ACC with relatively lesser dependence on imported coal (~15%) is betterplaced
than peers in an environment of surging prices of imported coal.
Other expenditure includes one-time provisioning of Rs236 mn as ACC changed its
policy of identifying obsolescence of spare parts.
Balance sheet analysis for CY2010
ACC incurred a capex of Rs7.2 bn during CY2010, most of which was done in 1HCY10
(Rs4.9 bn) as ACC commissioned 3 mtpa of clinker unit at Wadi along with a captive power
plant of 25 MW. Total debt reduced from Rs5.7 bn as of December 2009 to Rs5.2 bn as of
December 2010, implying a net cash balance of Rs5.6 bn.
We note that ACC commenced trial runs of it clinker unit at Chanda which also includes a
captive power plant of 25 MW.
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