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ACC (ACC)
Cement
Firm price trend, improved profitability. ACC reported strong sequential
improvement in profitability (akin to peers) at Rs900/ton for 1QCY11, although partially
offset by higher input costs. We note the improvement in dispatch growth in recent
months, though we remain concerned on ACC’s high dependence on Coal India, which
has recently revised prices of domestic coal and is constrained to meet commitments to
the cement sector. Maintain REDUCE with a revised PT of Rs1,050 (previously Rs1,000).
Sharp sequential improvement in profitability though lower than our estimates
ACC reported net sales of Rs24 bn (14% yoy, 23% qoq), operating profit of Rs5.5 bn (-11% yoy,
116% qoq) and net income of Rs3.5 bn (-13% yoy, 124% qoq) against our estimate of Rs23.8 bn,
Rs5.9 bn and Rs3.7 bn, respectively. Higher-than-estimated raw material and freight costs
(Rs589/ton and Rs559/ton against our estimates of Rs500/ton and Rs520/ton, respectively) were
only partially compensated by lower power and fuel cost leading to an EBITDA miss of 7%.
Volumes at 6.2 mn tons (10% yoy, 10% qoq) and average realization at Rs3,893/ton (3% yoy,
12% qoq) were broadly in line with our estimates of 6.2 mn tons and Rs3,800/ton. Effective tax
rate declined to 27.5% in 1QCY11. We discuss key highlights of the 1QCY11 results in
subsequent section.
Availability and pricing of domestic coal poses a key challenge going forward
Coal India Ltd has increased prices of domestic coal by ~30% from March 2011. ACC has a higher
dependence on domestic coal compared to peers due to a higher proportion of its cement plants
based in North and Central India. The problem is further compounded on account of the rising
coal-deficit in the country, which will transpire into lower allocation to the cement sector at
notified prices and a corresponding increase in the composition of high-priced imported coal and
open market purchases. We expect the full impact of the price increase by Coal India to likely
impact production costs over the next few quarters.
Maintain REDUCE with a revised target price of Rs1,050/share
We maintain our REDUCE rating on ACC with a revised target price of Rs1,050/share (previously
Rs1,000/share) as we roll forward to CY2012E based valuation. Our target price implies an EV/ton
of US$145/ton on CY2012E production and EV/EBITDA of 7.1X on CY2012E earnings. ACC is
currently trading at an EV/EBITDA of 7.7X CY2012E EBITDA and EV/ton of US$157/ton on
CY2012E production. We have revised our EPS estimates to Rs64/share in CY2011E (previously
Rs68/share) and Rs79/share in CY2012E (previously Rs83/share). We highlight that an earlier-thanestimated
weakening in cement prices remains a key downside risk to our earnings estimate.
Key highlights of 1QCY11 results
Volumes – ACC’s volumes during 1QCY10 improved to 6.2 mn tons (10% yoy, 10%
qoq) driven by ramp up of capacities commissioned in 1HCY10. We highlight that ACC’s
volumes, after lagging in CY2010, has remained strong in CY2011 driven primarily by
effect of 2.8 mtpa of incremental capacities in Karnataka (commissioned in 1HCY10).
Realizations – Sharp sequential improvement of Rs404/ton in realization was reflective of
a strong Rs40-50/bag price hike across India including ACC’s key markets of North and
Central India. Average cement prices in North increased by Rs29/bag over 4QCY10 prices
while prices in Central India increased by Rs40/bag.
Power and fuel cost – Power and fuel cost declined sequentially to Rs777/ton (10% yoy,
-3% qoq). We highlight that 30% price hike affected by CIL in February 2011 had limited
impact during 1QCY11 and expect full impact to flow in from 2QCY11E.
Freight cost – Freight cost increased to Rs559/ton (13% yoy, 5% qoq). We expect
further inflation in freight cost driven by likely hike in gasoline prices in the country. We
however note that ACC, with a relatively healthy mix of road and rail dispatch will be less
impacted by any increase in diesel prices.
Raw material cost – Raw material cost jumped sharply to Rs589/ton (17% yoy, 34%
qoq). Management has indicated that the increases in prices of fly ash and slag have been
the primary drivers of increase in raw material cost.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ACC (ACC)
Cement
Firm price trend, improved profitability. ACC reported strong sequential
improvement in profitability (akin to peers) at Rs900/ton for 1QCY11, although partially
offset by higher input costs. We note the improvement in dispatch growth in recent
months, though we remain concerned on ACC’s high dependence on Coal India, which
has recently revised prices of domestic coal and is constrained to meet commitments to
the cement sector. Maintain REDUCE with a revised PT of Rs1,050 (previously Rs1,000).
Sharp sequential improvement in profitability though lower than our estimates
ACC reported net sales of Rs24 bn (14% yoy, 23% qoq), operating profit of Rs5.5 bn (-11% yoy,
116% qoq) and net income of Rs3.5 bn (-13% yoy, 124% qoq) against our estimate of Rs23.8 bn,
Rs5.9 bn and Rs3.7 bn, respectively. Higher-than-estimated raw material and freight costs
(Rs589/ton and Rs559/ton against our estimates of Rs500/ton and Rs520/ton, respectively) were
only partially compensated by lower power and fuel cost leading to an EBITDA miss of 7%.
Volumes at 6.2 mn tons (10% yoy, 10% qoq) and average realization at Rs3,893/ton (3% yoy,
12% qoq) were broadly in line with our estimates of 6.2 mn tons and Rs3,800/ton. Effective tax
rate declined to 27.5% in 1QCY11. We discuss key highlights of the 1QCY11 results in
subsequent section.
Availability and pricing of domestic coal poses a key challenge going forward
Coal India Ltd has increased prices of domestic coal by ~30% from March 2011. ACC has a higher
dependence on domestic coal compared to peers due to a higher proportion of its cement plants
based in North and Central India. The problem is further compounded on account of the rising
coal-deficit in the country, which will transpire into lower allocation to the cement sector at
notified prices and a corresponding increase in the composition of high-priced imported coal and
open market purchases. We expect the full impact of the price increase by Coal India to likely
impact production costs over the next few quarters.
Maintain REDUCE with a revised target price of Rs1,050/share
We maintain our REDUCE rating on ACC with a revised target price of Rs1,050/share (previously
Rs1,000/share) as we roll forward to CY2012E based valuation. Our target price implies an EV/ton
of US$145/ton on CY2012E production and EV/EBITDA of 7.1X on CY2012E earnings. ACC is
currently trading at an EV/EBITDA of 7.7X CY2012E EBITDA and EV/ton of US$157/ton on
CY2012E production. We have revised our EPS estimates to Rs64/share in CY2011E (previously
Rs68/share) and Rs79/share in CY2012E (previously Rs83/share). We highlight that an earlier-thanestimated
weakening in cement prices remains a key downside risk to our earnings estimate.
Key highlights of 1QCY11 results
Volumes – ACC’s volumes during 1QCY10 improved to 6.2 mn tons (10% yoy, 10%
qoq) driven by ramp up of capacities commissioned in 1HCY10. We highlight that ACC’s
volumes, after lagging in CY2010, has remained strong in CY2011 driven primarily by
effect of 2.8 mtpa of incremental capacities in Karnataka (commissioned in 1HCY10).
Realizations – Sharp sequential improvement of Rs404/ton in realization was reflective of
a strong Rs40-50/bag price hike across India including ACC’s key markets of North and
Central India. Average cement prices in North increased by Rs29/bag over 4QCY10 prices
while prices in Central India increased by Rs40/bag.
Power and fuel cost – Power and fuel cost declined sequentially to Rs777/ton (10% yoy,
-3% qoq). We highlight that 30% price hike affected by CIL in February 2011 had limited
impact during 1QCY11 and expect full impact to flow in from 2QCY11E.
Freight cost – Freight cost increased to Rs559/ton (13% yoy, 5% qoq). We expect
further inflation in freight cost driven by likely hike in gasoline prices in the country. We
however note that ACC, with a relatively healthy mix of road and rail dispatch will be less
impacted by any increase in diesel prices.
Raw material cost – Raw material cost jumped sharply to Rs589/ton (17% yoy, 34%
qoq). Management has indicated that the increases in prices of fly ash and slag have been
the primary drivers of increase in raw material cost.
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