ACC - Q2CY13 result update - Centrum

Lower opex leads to higher OPM
ACC’s Q2CY13 result was above our and Bloomberg’s consensus estimates on
operational parameters with operating profit of Rs4.3bn (vs. est. Rs3.9bn) and
OPM of 15.5% (vs. est. 13.7%, Bloomberg consensus est. was 13.8%). Revenue at
Rs27.95 bn was in line with Rs28.1bn estimated. Profit at Rs2.6bn was in line with
estimated Rs2.5bn due to lower other income (Rs908mn vs. est. Rs1.1bn) and
higher tax rate of 29.5% (vs. est. 29%). The numbers are not comparable with
financials of Q2CY12 due to the merger of two subsidiaries’ financials in Q4CY12.
Cement demand has been under pressure for the past one year impacting the
pricing power of manufacturers (realization of the company is declining post
Q2CY12). Going forward, we expect recovery in cement demand in 2HFY14E,
which should result in improved pricing power for cement manufacturers
leading to improved profitability. We maintain Buy on the stock with a price
target of Rs1,389 based on 8x CY14E EBITDA.
 Sharp decline in margins: ACC reported revenues of Rs27.95bn (vs. est.
Rs28.1bn), EBITDA of Rs4.3bn (vs. est. Rs3.9bn) and adjusted profit of Rs2.6bn (vs.
est. Rs2.5bn). Higher-than-estimated operating profit was driven by sequential
improvement in OPM of the cement business despite a decline in sales volume
and realization sequentially. Reported numbers are not comparable on a YoY
basis due to the amalgamation of financials of two subsidiaries during Q4CY12.
Operating profit declined 33.4% YoY to Rs4.3bn and OPM contracted 7.9pp YoY
to 15.5%.
 Cement business’ profitability under pressure on lower realization and
higher opex: Revenue from cement business declined 3.3% YoY to Rs26.9bn
primarily due to 4.4% YoY drop in realization to Rs4,389/tonne. Sales volume
was up 1.2% YoY to 6.12mt. Operating cost/tonne increased 4.6% YoY to
Rs3,679/tonne led by higher raw material, employee, freight and other costs.
Operating profit of cement business declined 33.2% YoY to Rs4.3bn and OPM
contracted 7.2pp YoY to 16.2%. EBITDA/tonne of cement declined 34% YoY to
Rs710/tonne.

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 Lower operating profit and other income impact profits: Other income was
down 21.6% YoY to Rs908mn. Depreciation cost increased 2.3% YoY to Rs1.4bn.
Interest cost declined 40.6% YoY to Rs179mn. Led by lower operating profit
(33.4% YoY decline) and lower other income, adjusted profit declined 38% YoY
to Rs2.6bn.
 Expansion plans of the company: The company is planning to expand its
capacity by 5mt by 2015 at a capex of Rs33bn. The expansion plant comprises a
new grinding unit of 2.79mt capacity and grinding facility of 1.1mt at Jamul. In
addition, it will commission two grinding units in the Eastern region. The capex
requirement will be met through internal accruals.
 Maintain Buy: At the CMP, the stock trades at 12.4x CY14E EPS, 6.7x
EV/EBITDA, and EV/tonne of US$111.2. We value the company at 8x CY14E
EBITDA and maintain Buy rating on the stock with a price target of Rs1,389, an
upside of 16.2% from CMP. We also see support in the stock price as the Board
of Directors of Ambuja Cement has given in-principle approval to increase its
economic ownership in ACC by up to 10% over a period of 24 months at a
maximum amount of Rs30bn.