ACC - Good Market Spread; But Valuations Not Cheap Enough:: Citi

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ACC (ACC.BO)
Good Market Spread; But Valuations Not Cheap Enough
 Raising TP to Rs975, maintain Sell — We raise our TP to Rs975 (from
Rs635) based on Dec-11E EV/tonne of US$120 (vs. Sep-10E earlier). We
continue to use replacement costs as our key valuation tool, raising it to
US$120/t (from US$100/t) to reflect current capex trends. We now value
ACC in-line with replacement costs (vs. 10% discount previously). At our
revised TP, ACC would trade at an EV/EBITDA of 7.4x and a P/E of 15.8x. We
maintain our Sell rating as valuations appear to price in the positives but not
the weak near-term pricing/earnings outlook and cost pressures.
 Revising estimates — We cut PAT by 8% for CY10E and 9% for CY11E
incorporating: (1) Reduction in volumes by 6-13%; (2) Higher costs (fly ash,
slag, coal etc.); (3) Higher prices to reflect current trends. We assume
realizations fall 1% in CY10 (vs. -8% prev.) and -5% in CY11 (vs. -2% prev.).
 3QFY11: Price collapse and cost increases — Standalone PAT fell 77% to
Rs1bn in 3Q, sharply below our forecasts. EBITDA margins fell to 10% vs.
34% last year and EBITDA/t was Rs351 (-74% YoY). 3Q was hit by: (1) 14%
YoY and 12% QoQ price drop (South hit badly, ~22% of ACC sales); (2)
Sales volumes fell 3.7% YoY to 4.83mt due to partial shutdown (for
expansion), floods, and raw material constraints; and (3) Per tonne raw
materials, staff costs and other expenses all rose 16-22% YoY.
 Good market spread; Expansion update — ACC’s markets are well spread out:
North (23%), East (21%), South (22%), West (14%) and Central India (20%).
Total capacity as of Dec-09 was 26mtpa, up from 23mtpa (Dec-08). Ongoing
expansions at Wadi (Karnataka, 1.6mtpa) and Chanda (Maharashtra, 3mtpa)
will take total capacity to 30.5mtpa by end-2010. On trends so far, we expect
volumes to decline 2% in CY10 and rise 17% in CY11.
 Valuations look full — Producers have reportedly cut back on volumes,
using the ensuing scarcity to hike prices. While we expect prices to remain
firm in 3QFY11, we expect a correction from 4Q given adequate supply and
a long tail (~30) of companies (despite the Top 5 majors accounting for 55%
of capacity). ACC trades at an EV/t of US$125/t, which does not appear
overly expensive relative to current replacement costs, but, all other things
being equal, we would have to see a correction below the benchmark before
becoming more constructive, given our cautious view on the sector.
 Upside risks — (1) Continued price strength; (2) Delays in capacity; (3)
Higher-than-expected demand growth; and (4) Lower duties/taxes.