ACC :: Centrum

Higher opex leads to margin disappointment
We downgrade our rating on ACC to Hold from Buy with a revised price target
of Rs1,242 (earlier: Rs1,286) due to a) earnings cut of 15.2%/13% for
CY13E/CY14E considering higher operating costs (other expense and
employee costs) b) disappointment in current quarters’ earnings and c)
expensive valuations post sharp run-up in the stock price in the past 1.5
months. The company posted disappointing numbers with EBITDA at Rs2.3bn
(est. Rs3.1bn) and OPM at 9% (est. 12.9%) primarily due to a) Rs100/tonne QoQ
increase in other costs and b) Rs41/tonne QoQ increase in energy costs. Going
forward, we expect improvement in earnings led by recent price hikes taken
by cement manufacturers and expected recovery in sales volume. However, we
believe that the valuation at 9.3x CY14E EV/EBITDA is expensive considering
the uncertain macro environment.

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 Revenue above estimates, OPM disappoints: ACC reported revenues of Rs25.1bn
(est. Rs24.2bn), EBITDA of Rs2.3bn (est. Rs3.1bn) and profit of Rs1.2bn (est. Rs1.7bn).
Higher-than-estimated revenue was led by higher cement sales volume of 5.5mt (est.
5.3mt). However, a steep increase in other costs and sequential increase in energy cost
led to lower op. profit and OPM (9% vs. est. 12.9%). Reported numbers are not
comparable on a YoY basis due to the amalgamation of financials of two subsidiaries
during Q4CY12.
 Cement business’ profitability under pressure on lower realization and higher
opex: Revenue from cement business declined 1.5% YoY to Rs24.1bn primarily due
to 4% YoY drop in realization to Rs4,345/tonne. Sales volume was up 2.6% YoY to
5.54mt. Operating cost/tonne increased 6.2% YoY to Rs3,952/tonne led by higher
raw material, employee and other costs. Operating profit of cement business
declined 49.9% YoY to Rs2.2bn and OPM contracted 8.7pp YoY to 9.1%.
EBITDA/tonne of cement declined 51.1% YoY to Rs394/tonne.
 Earnings estimates revised downwards due to higher costs: We have revised
volume estimates downwards by 0.5%/1% for CY13E/CY14E and also realization
assumptions by 1.5%/1.2% for CY13E/CY14E. We have tweaked cost assumptions
(other expense and employee costs) upwards to factor in higher costs during the
quarter. Factoring in these changes, our EPS estimates are being revised downwards
by 15.2%/13% for CY13E/CY14E.
 Valuation and key risks: At the CMP, the stock trades at 16.6x CY14E EPS, 9.3x
EV/EBITDA, and EV/tonne of US$114.1. Considering expensive valuations, we
downgrade our rating on the stock to Hold from Buy, valuing the stock at 8x
EBITDA. Our target price offers an upside of 7.4% from current levels. Key upside
risks could be a) better-than-expected realizations and b) moderation in other
expenses going forward. Key downside risks could be a) higher energy costs and b)
fall in cement prices.