ACC; Results sharply below estimates:: JPMorgan

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ACC Limited Underweight
ACC.BO, ACC IN
Perfect Storm hits sector- ACC not immune; Results
sharply below estimates



• Perfect storm hits cement- ACC reports sharply below JPM/Consensus
estimates: ACC reported 3QCY10 EBITDA of Rs2.2bn (-69% y/y; -63% q/q),
versus JPMe (Rs3.8bn) and consensus estimates (Rs3.8bn), while net profit at
Rs1bn was -77% y/y and -72% q/q v/s JPMe PAT of Rs2.2bn. EBITDA/MT
stood at Rs458/MT (-67% y/y and -59% q/q). While the results were among the
weakest in recent history, as we had highlighted, the quantum of decline was
sharply higher than our estimates. A combination of lower volumes (-4% y/y,
-8% q/q), lower realizations (-13% y/y, -11% q/q) and continued elevated costs
(+17% y/y, +9% q/q) resulted in historically low EBITDA margins of 13.1%.
To put it into perspective, ACC last reported such weak numbers in
Q3CY05. We believe this is likely going to be the trend across the industry.
• Continued high fly ash, slag costs worrying: ACC indicated that it faces
elevated fly ash and slag costs for some of the units. As grinding capacity
increases across the industry we believe fly ash costs could remain elevated till
the new power capacities come on stream. Operations were also impacted by
the flood situation in parts of North India and at the Chanda unit. ACC has
commissioned the Wadi II expansion (increases capacity by 1.5MT) and
expects to commission the 3MT Chanda expansion next quarter.
• Cement price hikes over the last 1-month should aid margin expansion in
Q4; however, industry overcapacity means large price increases difficult to
hold: We estimate for ACC EBITDA/MT to increase 94% Q/Q driven by 5.5%
price increase and 17% volume increase q/q. While we do not expect the Sept
quarter profitability to be repeated, it does highlight the quantum of overcapacity
in the industry and hence any price increase (what has been seen in Sept-Oct) is
contingent on continued ‘supply discipline’ from the industry. We do not
forecast any material cost reductions for the company/industry.
• Reduce CY10E EPS by 16%, maintain CY11E, re-iterate UW: We maintain
our UW rating on the stock with Sept-11 PT of Rs750. At current valuations of
9.3x CY11E EV/EBITDA and $132/MT EV/MT, we think it would be attractive
only for those with multi year investment horizon (we are positive on the sector
on a 3-year view, but expect the next 18 months to remain difficult). We cut our
CY10E EPS estimates by 13-16% on the back of sharply lower Q3 numbers.