Buy ACC: Return of volume growth; target 1,104 :: Motilal oswal,

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


ACC: Return of volume growth; maintain Buy
Volume growth
 Volume growth has returned after three
years. We expect volumes to grow at a
CAGR of 11% over CY10-12 as against flat
volumes over CY08-10.
 The recently commissioned capacities of
7.2m tons would be sufficient to drive growth
over the next three years.
 With operations at new capacities stabilizing,
we expect volume growth to pick up in
1QCY11 to ~10% on a low base of last year
(volumes had declined by 2.6%).

Market mix
 ACC is a pan-India player, without
concentration in any particular region. Hence,
we believe it is the best proxy on the Indian
cement industry.
 Incremental volumes for ACC would be driven
by new capacities located in Karnataka
(South) and Maharashtra (West). These are
markets with adverse demand-supply
equilibrium in the short run.
 We expect ACC's 1QCY11 realization to
improve by Rs15/bag QoQ.
Cost and profitability
 ACC is highly dependent on domestic coal.
It would be the worst impacted due to the
recent increase in domestic coal prices. We
estimate ~Rs4/bag increase in energy cost
for ACC.
 With return of volume growth, we expect
operating leverage to dilute the impact of
energy cost inflation. Our estimates currently
do not factor in any operating leverage.
 We expect EBITDA/ton to increase by
Rs410 QoQ in 1QCY11 to Rs784, and by
Rs30 in CY11 to Rs761.
Earnings and valuation
 After three years of muted volume 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.
 Creeping acquisition by Holcim would provide
support to the stock price.
 The stock is valued at 18.2x CY11E EPS,
9.4x EV/EBITDA and US$121/ton (~30mt
capacity). Maintain Buy with a target price
of Rs1,104 (~10x CY11E EV/EBITDA).

ACC: Return of volume growth; maintain Buy
 Volume growth returns after three muted
years: With operations at new capacities
stabilizing, we expect volume growth to pick up
in 1QCY11 to ~10% on low base of last year
(2.6% de-growth). We estimate 11% volume
CAGR over CY10-12 (v/s flat in CY08-10).
 Incremental market mix in South and West:
While it is a pan-India player, ACC's incremental
volumes would be driven by new capacities
located in Karnataka (South) and Maharashtra
(West), where demand-supply equilibrium is
adverse in the short run.
 Highest exposure to domestic coal to reflect
in short-term performance: With ~85% of its
coal requirement being met by domestic coal
(~40% linkage), ACC would be the worst
impacted by the recent increase in domestic coal
prices, resulting in ~Rs4/bag increase in cost.
 RMC continues to be a drag on consolidated
EPS: ACC's RMC subsidiary continues to post
PBIT losses (Rs288m in CY10 v/s Rs477m in
CY09 and Rs918m in CY08). ACC has
aggressively invested in building the RMC
business, but a slowdown in volumes impacted
profitability. It has taken several initiatives to turn
around the RMC business and believes in its
potential to add value.


ACC: Levers present for re-rating
 Strong balance sheet with net cash of
Rs153/share: With completion of major capex
and strong cash flow from operations (~Rs18.2b
in CY11), we estimate ACC's net cash balance
at Rs153/share.
 Securing coal blocks to ensure supply of
cost-effective energy: ACC has equity stake
in two coal blocks, viz. ~200m tons reserve in
Madhya Pradesh (~50% stake) and ~685m tons
reserve in West Bengal (~14% stake). These
mines are expected to become operational in 3-
4 years, and will provide cost-effective long-term
energy supply assurance.
 Creeping acquisition by Holcim to support
stock: Holcim's creeping acquisition (~3.2% of
5% permissible in a financial year done in
FY11YTD) would provide support to the stock.
Holcim currently holds 48.8% stake in ACC.
 Merger of ACC and Ambuja inevitable, but
unlikely in near future: Merger of ACC and
Ambuja is inevitable for Holcim to fully reap
synergies of operations from (a) coordination at
market level, (b) freight optimization, and (c)
savings on SG&A. However, we believe there
are challenges in the form of (a) cultural
differences and (b) brand migration, which
Holcim would need to address before the merger
of two entities.

ACC: Valuation and view
 Improvement in the earnings power of ACC's
assets coupled with completion of divestment
of non-core businesses makes it an attractive
pure-play on cement, offering a truly pan-India
presence.
 After two years of muted volume growth, we
expect ACC to post robust volume growth of
~12% CAGR over the next two years, driven
by new capacities.
 Allotment of coal blocks in Madhya Pradesh
(in a JV with the state) and West Bengal (in a
consortium) offers option value.
 The stock is valued at 18.2x CY11E EPS, and
at an EV of 9.4x CY11E EBITDA and US$121/
ton (~30m-ton capacity). Maintain Buy with a
target price of Rs1,104 (~10x CY11E EV/
EBITDA).