Buy ACC on dips to Rs 1,365 - Rs 1,423 for target of Rs 1,538 in 1 quarter :: HDFC Securities

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ACC, part of Holcim group, recently reported its Q4CY14 results below street expectations. Given below are some of the key highlights, which we came across while reviewing the results. Key highlights of Q4CY14 results: ACC’s standalone topline rose by 2.8% y-o-y to Rs.2,763.1 cr in Q4CY14, owing mainly to a 4.4% rise in realisations. Volume fell by 1.5% due to shutdown of its limestone mines. The operating performance q-o-q weakened due to higher freight costs and raw material costs. EBITDA/ton during the quarter stood at Rs.309.1 per ton (down 31% y-o-y and 43% q-o-q). ACC standalone reported net profit of Rs.323.6 cr up 16.4% y-o-y owing to a tax credit reversal.

Other Highlights:  Volumes were weak at 5.76mtpa (down 1.5% y-o-y) and continued to lag industry peers as Southern region continued to witness weak demand. However, realisation was up 4.4% y-o-y to Rs.4,796/t. The improvement was led by higher realisation in South (~Rs.700/t q-o-q) and West (~Rs.350/t q-o-q; ~35% of volumes). This was partially offset by lower prices in North & Central region (~42% of volumes). Raw Material costs/t jumped 23% q-o-q and freight costs/t 24% q-o-q as it purchased clinker from outside sources due to the temporary suspension of Orissa and Jharkhand mines (set to normalise in coming quarters). This led to EBITDA/t falling by~43% q-o-q to Rs.309.1/t.  Jamul capacity expansion update: The 2.79 mtpa clinker capacity is expected to be commissioned by 2015. At the same time, ACC plans to increase the grinding capacity at Sindhri, Jharkhand by 1.35 MT of cement while a new plant with annual capacity of 2.7 MT is scheduled to be built in Kharagpur. Construction plans at both locations are progressing well. With their commissioning, the company's total cement production capacity is expected to increase to 35 MT by FY15E from the existing 30 MT. We believe that the company will get the benefits of new capacities in CY16E.

 ACC is still one of the higher cost producers due to high fixed costs structure and legacy plants. However, with proposed synergies from the Holcim restructuring, we expect efficiencies to improve, going ahead. ACC’s pet coke usage is likely to rise and be 20% by next year. Similarly, usage of alternative fuel is expected to rise from the current 2% to 5% over the next 12 months. The 7.7 MW waste heat recovery facility is likely to be commissioned soon. The company is also focusing on increasing the volume of premium products to improve realisation.  ACC’s limestone mining operations at Chaibasa and Bargarh plants were temporarily suspended during the fourth quarter following a Supreme Court order. The company has stopped the clinker production at both the plants after the notice from government. As per the New Mining Ordinance of January 2015, the management expects these operations to commence shortly. These plants have a 2.5mtpa clinker and 4mtpa cement capacity.  De-allocation of coal blocks: ACC Mineral Resources (AMRL), a wholly owned subsidiary of the company, had participated in four 49:51 joint ventures (JV) with the Madhya Pradesh State Mining Corporation (MPSMCL) for development and mining of four coal blocks allocated to MPSMCL. The company had applied for the development and mining operations through a competitive bidding process, consequent to which the JVs were effected, in which AMRL and MPSMCL hold 49% and 51% shares respectively. The Supreme Court, vide its decision of 24 September 2014, held that allocation of various coal blocks, including those allocated to MPSMCL, is arbitrary and illegal, and hence liable to be cancelled. Subsequently, the Government promulgated The Coal Mines (Special Provisions) Ordinance, 2014, which intends to take appropriate action to deal with the situation arising pursuant to Supreme Court's decision. The management, based on its contractual rights under its JV agreements, its interpretation of the Ordinance and on the basis of legal advice, believes that the financial loss or operational impact, if any, will not be significant. Concerns  Additional capacities coming on stream and/or fall in growth of demand could lead to decline in cement prices and in turn lower realisations. There could also be a pressure on margins, which may have to be offset by control in costs.  Rise in input costs like coal, slag, fly ash, royalty and gypsum could put pressure on margins as could increase in freight costs. Higher freight cost related to Chaibasa and Bargarh plants where limestone mining has been stopped from 10th Oct 2014. Any prolonged delay in resumption of production from two limestone mines could result in further margin pressures.  Final resolution of Competition commission’s order if negative, could impact ACC’s cash flows and profits.  Subdued volume growth. Any delay in commissioning of new capacities. Conclusion & Recommendation ACC reported a disappointing performance in the December quarter due to a mine shutdown, which dragged down operating profit, while volume growth remained sluggish. ACC has always traded at discount to its peers, Ambuja (ACL) and Ultratech (UTCL), primarily due to lower margins, attributed to old and inefficient plants. The differential could recede in CY16 with the stabilisation of its replaced facilities in Wadi and Chanda and commissioning of last of its project at Jamul. ACC has reported a meek 3% CAGR in cement volumes over the past three years, compared to industry growth of 5% during the same period.

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