Associated Cements --Volume key driver :: Macquarie Research,

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Associated Cements
Volume key driver
Event
 2QCY11 results marginally below estimates: ACC reported 2QCY12
results that were 6% lower than our estimates at the, operational line due to
higher costs. We believe that a dearth of growth options, given oversupply in
the market will make growing volumes further difficult. Maintain Underperform.
Impact
 2QCY11 results –dip in profits: ACC reported net sales at Rs25.4bn, up
17% YoY as sales volume increased 13% and realization improved by 5%.
However, higher costs resulted in EBITDA at Rs5.5bn, down 1% QoQ. Also,
higher interest and depreciation as well as tax meant net profit at Rs3.3bn,
down 7% YoY as well as QoQ.
 CY11 numbers on track: In the first half, ACC achieved 51% of our shipment
estimates, 57% of our EBITDA and 55% of our full year EPS estimate.
However, we expect a decline in cement prices as the impact of oversupply
gets aggravated in the upcoming slack season and are forecasting EBITDA/t
of Rs815 for the full year.
 Cement price have started cracking: Cement prices in East, Central and
parts of Western India have declined by Rs40/bag or almost 15% since the
peak in May. North India has seen Rs15/bag or around 5% decline; South
India has held on as off now. Demand remains very weak, and it is unlikely
that scenario improves in near term.
 Operating leverage can reverse: ACC has higher cost structure as
compared to its peers as evident from ACC reporting Rs200/t lower EBITDA
than the Rs1100 or so reported by its peers. This quarter they benefitted due
to higher volume growth, but in H2 we expect lower volumes due to seasonal
impacts and this should have a reverse impact on profitability. Already ACC’s
earnings in the first half are down 9% over same period last year despite an
11% increase in volumes and 4% increase in realisations, as cost increase
has so far outpaced capacity gains
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs799.00 based on a DCF methodology.
 Catalyst: Fall in cement prices
Action and recommendation
 Maintain Underperform: We continue to believe that, given the higher risk
factors on cement prices and rising costs, the current PER of 15-13x looks
highly stretched. ACC will continue to see pressure on prices and will face
difficulty in growing volumes, given oversupply in the market.