ACC EARNINGS REVIEW : Sell Below expectations;: Goldman Sachs

Visit http://indiaer.blogspot.com/ for complete details 􀂄 􀂄

ACC EARNINGS REVIEW : Sell Below expectations; twin impact of adverse realizations and costs





What surprised us
ACC reported 3QFY10 net income of Rs1.0 bn (-77% yoy, -72% qoq), 53%
below our expectations of Rs2.1bn and 56% below Reuter’s
consensus. The topline at Rs16.8bn declined by 16% yoy and 18% qoq on
lower volumes (-5% yoy on plant shutdown and intense competition) and
lower realizations (-13% yoy). While the muted top line was marginally
below expectations, it was the higher than expected costs that led to a
sharp margin compression—3QFY10 EBITDA margin was 13% (-2200 bp
yoy, -1572 bp qoq), the lowest margin since 2005. EBITDA per ton came in
at Rs458 (GSe: Rs810), vs. Rs1,391 in 3QFY09. While freight and power/fuel
expenses were in control, the significant miss can be attributed to higherthan-
expected material costs (+67% yoy), higher employee costs (+18%
yoy) and other expenses (+19% yoy).
What to do with the stock
While we were expecting ACC to report a sharp decline in margins/
profitability and potential consensus downgrades post 3QFY10 earnings, the
market (including us) underestimated the extent of decline. We do note that
3QFY10 was hit by better–than-expected monsoons in Northern India (ACC’s
key market) and pricing should recover in 4Q. However, the recovery would be
more gradual, than what is being reflected in valuations, in our view. The
stock, trading at 136% EV/RC, is higher than 1SD above its mid-cycle valuation
of 100% EV/RC. We reiterate our Sell rating (on CL) and 12-m EV/RC-based TP
of Rs728, implying 26% downside. We cut our FY10E EPS by 19% to account
for lower realizations and higher costs, and fine-tune FY11E/FY12E estimates.
Risks: Faster-than expected recovery in pricing.