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Earnings pressure to continue
3Q disappoints; margin close to levels of FY97-02 downturn
ACC’s 3Q CY10 net profit fell 79% YoY and 75% QoQ to Rs863mn; EBITDA
decline was also 70-75% YoY & QoQ. Results were significantly below our
expectations due to 1) lower than expected cement prices (down 12-14% YoY &
QoQ), and 2) higher operating costs (+16% YoY & 8% QoQ). ACC’s 3Q EBITDA
was ~Rs340/ton and EBITDA margin at ~9.4% was close to levels witnessed
during the previous cyclical downturn through FY97-02.
CY11E earnings to fall YoY; forecasts cut by 19-32%
We have cut profit forecasts by 19% for CY10E and 32% for CY11E to reflect
margin pressures. We expect CY11E earnings to decline 22% YoY, post a 26%
profit decline in 2010E. Recent increase in cement prices across India (esp. south
India) will boost QoQ earnings for 4Q but we think rational pricing arrangements
are unlikely to sustain; we forecast 2% YoY decline in cement prices for CY11E.
We expect the industry’s supply-demand balance to remain weak (~77% capacity
utilization) over next 12 months with potential downside if demand falters.
ACC’s expansion plans continue to face execution delays
ACC’s volume growth has lagged the industry in YTD CY10 and we expect ACC
to remain a laggard in CY11E. We think capacity expansions at Wadi & Chanda
(3mn tpa each) will be ready by 2H CY11 vs 2H CY10 as per the Co’s initial plans
Valuations seem unsustainable; reiterate underperform
ACC is currently trading at an EV/capacity of ~US$130/ton for CY11E implying
~5-8% premium vs replacement cost. We are rolling our replacement cost
estimates from CY10 to CY11; our new PO of Rs730/sh is based on 20-25%
discount to replacement cost due to weak/falling RoE and downside risk to
earnings. We value ACC at an EV/capacity of ~US$95/ton (up 12% vs earlier)
after factoring replacement cost of ~US$125/ton (vs US$110/ton assumed earlier)
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