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ACC (ACC.BO): Remove from Conviction List, retain Sell
Investment thesis
We remove ACC from our Conviction List on lack of near-term
negative catalysts, but retain Sell. Since we added ACC to our
Conviction Sell list on June 22, 2010, it has risen 30% compared with
11% rise in the BSE Sensex, which we attribute to strong cement
pricing and newsflow on parent company (Holcim) hiking its stake.
Over the past 12 months, the stock is up 17.8%, vs. 11.4% rise in the
BSE Sensex.
High exposure to North and South: With about 70% of its exposure
to markets in the North and South—markets which are witnessing
subdued demand growth and severe over capacity—we believe ACC
would be the most impacted by a potential correction in cement
prices from current peak levels.
High proportion of domestic coal sourcing: ACC sources about
85% of its coal requirement from domestic sources (about 40% from
linkage and 45% from domestic e-auction)—and would be most
impacted by Coal India’s recent coal price hike (about 30% hike on
avg). This will offset the benefit from a higher pricing environment.
Margin recovery to be subdued: After industry-lagging volume
growth in the past 4 years due to capacity constraints and logistical
bottlenecks, we now expect a 12% volume growth by ACC in
CY2011E. This is underpinned on stabilization of new capacity.
However, a bullish volume and price outlook does not translate into
a commensurate margin recovery due to sustained cost pressures.
Expensive valuations: ACC is trading at 122% EV/RC, higher than its
mid-cycle valuation of 100% EV/RC. The stock is currently trading at
2.9X CY2011E P/B – at over 33% premium to the Indian cement sector
average of 2.3X 2011E P/B.
Retain Sell: We raise our CY11E-CY13E EPS by +3%-14% on higher
price and volume assumptions – and raise our 12-m EV/RC-based TP
to Rs934 (from Rs757) on higher replacement cost.
Potential catalysts
1) Price erosion in its key markets of north & south
2) Cost push increase
Key risks
Higher-than-expected despatch growth; expectations of parent
company (Holcim) hiking its stake; and stronger-than-expected
pricing.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ACC (ACC.BO): Remove from Conviction List, retain Sell
Investment thesis
We remove ACC from our Conviction List on lack of near-term
negative catalysts, but retain Sell. Since we added ACC to our
Conviction Sell list on June 22, 2010, it has risen 30% compared with
11% rise in the BSE Sensex, which we attribute to strong cement
pricing and newsflow on parent company (Holcim) hiking its stake.
Over the past 12 months, the stock is up 17.8%, vs. 11.4% rise in the
BSE Sensex.
High exposure to North and South: With about 70% of its exposure
to markets in the North and South—markets which are witnessing
subdued demand growth and severe over capacity—we believe ACC
would be the most impacted by a potential correction in cement
prices from current peak levels.
High proportion of domestic coal sourcing: ACC sources about
85% of its coal requirement from domestic sources (about 40% from
linkage and 45% from domestic e-auction)—and would be most
impacted by Coal India’s recent coal price hike (about 30% hike on
avg). This will offset the benefit from a higher pricing environment.
Margin recovery to be subdued: After industry-lagging volume
growth in the past 4 years due to capacity constraints and logistical
bottlenecks, we now expect a 12% volume growth by ACC in
CY2011E. This is underpinned on stabilization of new capacity.
However, a bullish volume and price outlook does not translate into
a commensurate margin recovery due to sustained cost pressures.
Expensive valuations: ACC is trading at 122% EV/RC, higher than its
mid-cycle valuation of 100% EV/RC. The stock is currently trading at
2.9X CY2011E P/B – at over 33% premium to the Indian cement sector
average of 2.3X 2011E P/B.
Retain Sell: We raise our CY11E-CY13E EPS by +3%-14% on higher
price and volume assumptions – and raise our 12-m EV/RC-based TP
to Rs934 (from Rs757) on higher replacement cost.
Potential catalysts
1) Price erosion in its key markets of north & south
2) Cost push increase
Key risks
Higher-than-expected despatch growth; expectations of parent
company (Holcim) hiking its stake; and stronger-than-expected
pricing.
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