ACC --Profitability nosedives --REDUCE says Kotak Sec

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ACC (ACC)
Cement
Profitability nosedives. ACC’s operating margins contracted to historical lows—10%
in 3QCY10 compared to 34% during the same period last year. A sharp sequential
decline in realizations and a substantial increase in raw material cost were key
contributors to margin contraction. We continue to maintain our conservative stance on
ACC, as the rich valuations do not take cognizance of limited price improvement in
ACC’s key markets of North and Central India.


Margins hit historical lows on low realizations and high input costs
ACC reported net sales of Rs16.4 bn (-17% yoy, -19% qoq), operating profit of Rs1.7 bn (-75%
yoy, -69% qoq) and net income of Rs1 bn (-77% yoy, -72% qoq) against our estimate of Rs17 bn,
Rs3.7 bn and Rs2.2 bn, respectively. Marginally higher-than-estimated volumes at 4.8 mn tons
only partially compensated for the 12% qoq decline in realizations from Rs3,834/ton in 2QCY10
to Rs3,390/ton in 3QCY10.
A sharp increase in raw material cost from Rs445/ton in 2QCY10 to Rs632/ton in 3QCY10 (our
estimate Rs400/ton) led to further contraction of EBITDA margins from 27.4% in 2QCY10 to
10.4% in 3QCY10. Management has attributed the increase in raw material cost primarily to
higher costs for slag and fly ash.
Realizations take a beating as prices in key markets remain weak
Cement prices in ACC’s key markets (North and Central) have gradually trended downwards
during the quarter resulting in a 12% sequential decline in average realization. Cement prices in
North India have come down from Rs243/bag in June 2010 to Rs236/bag in August 2010 while
prices in Central India have declined from Rs244/bag in June 2010 to Rs223/bag in August 2010
(see Exhibit 3). We highlight that although the decline in cement prices in North and Central has
not been as sharp as that of South and West India, the latter regions have recovered some ground
on back of recent rounds of price hikes. Although no such price hike has been witnessed in either
North or Central markets, we believe both these regions could witness a few rounds of price hikes
in 4QCY10 as the demand environment improves post the prolonged monsoon season.
Maintain REDUCE with a revised target price of Rs940/share
We maintain our REDUCE rating on ACC with a revised target price of Rs940/share (previously
Rs980/share) as we account for lower realizations and higher input costs. We also remain
concerned about ACC’s continual loss of market share and declining volumes. Our target price
implies an EV/ton of US$145/ton on CY2011E production and EV/EBITDA of 6.2X on CY2011E
earnings. ACC is currently trading at an EV/EBITDA of 6.6X CY2011E EBITDA and EV/ton of
US$153/ton on CY2011E production.