ACC (ACC): Strong volume growth; no value  ::HSBC Research

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ACC (ACC): Strong
volume growth; no value
 Pan-India player unlikely to benefit from a pick up in a certain
region; expect decent volume growth though after a tepid CY10
 CROGCI to stay below CY09 levels on higher costs and lower
asset turns
 Still expensive given the cement pricing cycle; initiate with UW
and TP of INR970


Pan-India presence; pricing pressure across
ACC is truly a pan-India play with a presence in
all regions across India. Our expectation of an
overall surplus in cement markets across India
will likely hurt ACC as well. Whereas production
discipline will ensure that cement prices will not
fall dramatically, capacity utilisation levels for
ACC will continue to be low.
Volume growth to improve after a flattish CY10
We expect volume growth for ACC to improve
(c10% CAGR over CY10-13e) as newly created
capacities at Chanda, Maharashtra will aid volume
growth after a flattish CY10. We note that in
1QFY12, ACC’s despatch growth at c14% was
higher than the industry’s despatch growth.
EPS growth lower than volume growth
We expect cost acceleration to outpace growth in
volumes, and higher depreciation charges leading to
muted EPS growth (at 6.4% compounded) over
CY10-13e. We note that CROGCI has already
reached its high in CY09 with low costs, high asset
turnover and higher cement prices; and do not expect
that number to be attained over the next three years.
Costs likely to stay high; positive surprise in
2009 not recurring
We expect coal and freight cost increases to keep
costs high over the next three years. Costs were
materially lower in CY09 and we do not expect
the benefits of lower manufacturing expenses and
employee costs to recur over the next few years.
Valuations still high given the cycle; initiate
with an Underweight rating and TP of INR970
ACC has corrected 13.5% over the last 3 months
after Holcim’s acquisition of a majority stake. We
adjust historical multiples for an acquisition
premium, and based on various valuation approaches
(EV/EBITDA, PE and EV/GCI), we initiate on ACC
with an UW rating and TP of INR970.
Risks
Upside risk: Greater-than-expected ramp-up of
new capacity in Maharashtra may add positive
volume surprise to our estimates.
Downside risk: Rising costs of raw material and
challenges in streamlining new capacity addition.