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Initiation: sales pick-up paves the
way for solid earnings outlook
• Pan-India cement player with no concentration in any particular
region
• Sales-volume growth and improving EBITDA margin to drive a
19.2% earnings CAGR for 2010-13E
• Robust balance sheet would help take the company to the next
phase of capacity expansion without too much strain
What's new
ACC’s strong balance sheet, Indiawide
presence and capacity
additions in 2010 should lead to a
10.7% sales-volume CAGR for 2010-
13E, following muted sales-volume
growth over the past two years.
What's the impact
ACC recorded a 36% YoY decline in
earnings for 2010, led by falling
cement prices, higher costs and
lower sales volumes. With fresh
capacity additions of 6m tonnes over
the past 12 months, taking installed
capacity to 30m tonnes, together
with our expectation of a revival in
demand for cement, we believe
ACC’s sales volume will see a sharp
increase for 2011. We forecast a 2011
sales volume of 23.6m tonnes (up
12.4% YoY), rising to 26.1m tonnes
(up 10.7% YoY) for 2012. This,
combined with the cost efficiencies
and rising captive power that we see,
should help the company improve
its EBITDA margin by 230bps over
the next three years. ACC is a pan-
India player, and we believe its
nationwide presence has insulated it
from regional demand fluctuations.
What we recommend
We initiate coverage with a Buy (1)
rating and six-month target price of
Rs1,188, based on a 2012E
EV/EBITDA multiple of 8.5x (towards
the higher end of its mid-cycle past-
10-year EV/EBITDA multiple trading
range). We believe the stock should
trade at this valuation, given the
improvements that we see in cement
demand, its robust balance sheet, and
the 330bp improvement that we
forecast in its core ROE over the next
two years. We forecast an earnings
CAGR of 19.2% for the 2010-13 period,
as we believe ACC will increase
cement prices over the next three
years, mitigating power- and freightcost
inflation.
How we differ
Our 2011-12 EBITDA forecasts are
1.8% and 7.2%, respectively, higher
than those of the Bloomberg
consensus. We believe the market
expects a weak cement pricing
environment, which means pressure
on the EBITDA margin, because of
cement overcapacity during the next
12 months. We think the overcapacity
problem is real, but if demand
improves it should be absorbed by the
market quickly. Also, logistical issues
(ie, a shortage of railway wagons and
industry discipline among the large
cement players) should help balance
out the cement demand-supply
mismatch.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Initiation: sales pick-up paves the
way for solid earnings outlook
• Pan-India cement player with no concentration in any particular
region
• Sales-volume growth and improving EBITDA margin to drive a
19.2% earnings CAGR for 2010-13E
• Robust balance sheet would help take the company to the next
phase of capacity expansion without too much strain
What's new
ACC’s strong balance sheet, Indiawide
presence and capacity
additions in 2010 should lead to a
10.7% sales-volume CAGR for 2010-
13E, following muted sales-volume
growth over the past two years.
What's the impact
ACC recorded a 36% YoY decline in
earnings for 2010, led by falling
cement prices, higher costs and
lower sales volumes. With fresh
capacity additions of 6m tonnes over
the past 12 months, taking installed
capacity to 30m tonnes, together
with our expectation of a revival in
demand for cement, we believe
ACC’s sales volume will see a sharp
increase for 2011. We forecast a 2011
sales volume of 23.6m tonnes (up
12.4% YoY), rising to 26.1m tonnes
(up 10.7% YoY) for 2012. This,
combined with the cost efficiencies
and rising captive power that we see,
should help the company improve
its EBITDA margin by 230bps over
the next three years. ACC is a pan-
India player, and we believe its
nationwide presence has insulated it
from regional demand fluctuations.
What we recommend
We initiate coverage with a Buy (1)
rating and six-month target price of
Rs1,188, based on a 2012E
EV/EBITDA multiple of 8.5x (towards
the higher end of its mid-cycle past-
10-year EV/EBITDA multiple trading
range). We believe the stock should
trade at this valuation, given the
improvements that we see in cement
demand, its robust balance sheet, and
the 330bp improvement that we
forecast in its core ROE over the next
two years. We forecast an earnings
CAGR of 19.2% for the 2010-13 period,
as we believe ACC will increase
cement prices over the next three
years, mitigating power- and freightcost
inflation.
How we differ
Our 2011-12 EBITDA forecasts are
1.8% and 7.2%, respectively, higher
than those of the Bloomberg
consensus. We believe the market
expects a weak cement pricing
environment, which means pressure
on the EBITDA margin, because of
cement overcapacity during the next
12 months. We think the overcapacity
problem is real, but if demand
improves it should be absorbed by the
market quickly. Also, logistical issues
(ie, a shortage of railway wagons and
industry discipline among the large
cement players) should help balance
out the cement demand-supply
mismatch.
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