Sell ACC: 2QCY11 results ::CLSA

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2QCY11 results
ACC’s 2Q net earnings came-in 5% below estimates at Rs3.4bn (-6%
YoY) despite in-line Ebitda due to higher tax rates. Volume growth for
ACC had been strong during 2Q at 13% YoY, thanks to the recent capacity
expansions. Ebitda margins marginally increased on a sequential basis as
the impact of higher realisation was largely offset by higher costs. With
the cost base likely to stay high and recent price corrections, outlook on
margins is weak in the medium term. Despite the 5ppt underperformance
in the last three months, we expect the trend to continue given the weak
sector fundamentals and retain our Sell rating on the stock.
2Q operating performance in-line; net earnings below estimates
ACC’s standalone Ebitda remained flat YoY at Rs5.5bn, in-line with our
estimates. Blended cement realisations rose 4% QoQ to Rs203/bag, in-line;
unit costs too came in-line and were up 4% QoQ. Following the capitalisation
of new plants, depreciation (+20% YoY) and interest (+90%) rose while other
income grew 30%. Tax rates at 30.5% were much higher than our estimates
and key reason for a 6% decline in net earnings to Rs3.4bn (5% below
estimates). Consol. net earnings declined 6% YoY to Rs3.5bn as losses in
RMC segment were 55% higher.
Front ended capacity driving ACC’s volume growth
ACC’s recent capacity additions (6mt in west/south) drove a strong 13%
volume growth in 2Q despite a moderate 0.4% growth in industry volumes.
We expect a similar trend to continue in the coming quarters and model in a
9%+ growth during 2HCY12. We however note that this is off a low base as
the company’s volumes declined ~1.5% in 2010.
Expect margin pressure to impact earnings in 2H
ACC’s 2Q cost base was impacted due to a sharp 30% rise in linkage coal
prices (Mar-11), as evident from ~23% QoQ rise in power & fuel; freight
costs too rose 5% QoQ. Resultant Ebitda margins rose only 3% QoQ despite
better realisations. We note that the recent 3-20% cement price corrections
across regions would impact ACC’s margins in the coming quarters as we
build in a ~35% corrections in 2HCY12 (cf. 1H).
Maintain earning estimates; retain Sell
ACC has underperformed the markets by 5ppt in the last three months which
should continue give the weak industry fundamentals. We retain our cautious
sector view and expect margin pressures to continue in the medium term.
Valuations at 9x 1-year forward EV/Ebitda, 18x PE are rich in this context;
maintain Sell (target: Rs900/sh).