ACC - Q1CY2011 Result Update: LKP

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The cement industry has had a robust January to March quarter as the production discipline provided a 25-30% YoY rise in the cement prices during the past 4-6 months. The sharp increase in cement prices has enabled the industry to combat increase in energy prices and increase in cost on account of implementation of VAT. Approaching monsoons and lower construction activities witnessed in recent past could pose an uncertainty to future growth for cement demand. Hence, we believe that cement prices at these levels are not sustainable and could correct by ~ Rs.15-20 per 50kg bag. Thus, in spite of robust performance by ACC in Q1CY11 we refrain from upgrading our earnings estimates. We maintain our NEUTRAL rating with an upward revision in price target to Rs.1065     

Cement Business Shines - Total Revenue Up 14% YoY & 22% QoQ

Total Revenues stood at Rs.25.6 bn depicting a growth of 14% YoY & 22% QoQ. Cement revenues were up by 14% YoY & 22.5% QoQ atRs.24 bn. This is backed by 10.4% YoY & 9.8% QoQ growth in volumes to 6.16 MT v/s 5.58 MT in Q1CY10 & 5.61 MT in Q4CY10. The net realization grew by 3.4% and 11.6% QoQ to Rs.3893/ton v/s Rs.3767/ton in Q1CY10 & Rs.3490/ton in Q4CY10. Cement EBITDA/Ton declined by 19% YoY to Rs.900/ton v/s Rs.1115/ton in Q1CY10. This was on account of 13% increase in the total cost v/s a mere 3.4% rise in net realization with maximum increase in raw material cost. However, QoQ EBITDA showed a significant improvement of 142%. This was on account of 4% decline in the total cost with major decline in employee and other costs.

Overall Profitability Maintained Its Declining Trend.

Overall consolidated EBITDA declined by 10% YoY to Rs.5.6 bn despite a 172% growth sequentially. EBITDA margins also declined by 580 bps YoY while it showed an improvement of 1200 bps on QoQ basis to 21.8%. Net Profit also declined by 11.4% YoY while it grew by 42% QoQ to Rs.3.5 bn. Net Profit margin fell by 390 bps YoY and showed a modest growth of 196 bps QoQ to 13.6%. Poor demand ahead of monsoons and rising input cost will continue to put pressure on margins. 

Outlook & Valuation

At the CMP of  Rs.1126 the stock is trading at EV/EBITDA of 12x & 10.8 for CY11E & CY12E respectively. The stock is expensive at an EV/TON of USD 146 & USD 145 for CY11E & CY12E respectively. The stock is trading at a premium of over 20% to its replacement cost, which we believe is expensive keeping in mind the profit-declining trend witnessed by the industry. We thus assign a 15% premium to its replacement cost and maintain our NEUTRAL rating with price target of  Rs.1075 (prev. Rs.1015). At our price target, the stock would be valued at EV/EBITDA of 10.3x & EV/TON of USD 138 for CY12E. 

 

LKP Research