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ACC and Ambuja
ACC.BO, ACC IN
Underweight
Price: Rs1,022.10
Price Target: Rs900.00
In-line earnings; near-term pressure given higher
costs, lower prices, and weak demand
UTCEM beat earnings on company-specific issues, while ACEM and ACC results
were broadly in-line, with higher-than-expected ASPs. Stocks have moved up
over the last few days on expectations of a price recovery after the rains in
Sept/Oct. While traditionally buying cement equities over Aug-Oct has made
money in the Nov-April period given that both demand and prices recover, we
believe that this year, with demand weakness, a price recovery would essentially
be driven by supply discipline, the sustainability of which is difficult to call.
Results broadly in-line for ACC, ACEM: ACC reported PAT of Rs3.4B vs
JPMe and BBRG consensus of Rs3.1B, while ACEM reported PAT of Rs3.5B
vs JPMe of Rs3.6B and BBRG consensus of Rs3.4B. EBITDA margins for both
the companies were slightly ahead of estimates mainly on higher ASPs. The
June quarter saw price declines pick up pace from mid-May. In terms of q/q
ASP change, ACC reported +4% (+5% y/y), ACEM+5% (+-6% y/y) and
UTCEM +9%, while EBITDA/MT for ACC stood at Rs978/MT (+4% q/q),
ACEM Rs1131/MT (+2% q/q) and for UTCEM Rs1221/MT (+22% q/q).
Stocks seem to be recovering, now what? Cost pressures (freight, energy)
should continue to move up from current levels. Seasonally Sept is the weakest
quarter with demand and prices correcting sharply given the rains (so far May-
July has seen a significant price correction of 10-20% across markets in North,
West and Central India). The only region where cement prices have held up is in
South India. Cement stocks over the past two weeks have outperformed the
markets given the macro weakness and the expectations of a price recovery after
the rains. On a relative basis, the large-cap cement stocks are debt-free, and
valuations do not appear demanding, but for a trade, we would wait for better
entry points. The medium-term outlook remains challenging given weak demand
and massive overcapacity (289MT capacity vs 210MT demand).
Do not rely on demand recovery for price recovery: Admittedly the base
would be more favorable from Oct onwards and y/y growth rates are likely to
improve from current levels (1Q FY12 industry dispatch growth rate stood at
0.4% vs our FY12 estimate of 7%); however, on the ground the situation
remains worrying, and for a meaningful demand recovery we need to see the
large cement markets such as UP+NCR (Central North) see a sharp recovery.
For cement prices to recover from here in North/Central/West India, we believe
supply discipline would be the key.
Post-rains demand recovery in UP the most critical, in our view, given
capacity commissioning: While demand is weak across most states, we
believe the most critical state is UP, which is India’s largest cementconsuming
state. Continued weakness there could lead to continued pricing
pressure in North/Central India.
Higher ASPs help earnings
ACC reported a better-than-expected 2Q CY11 with EBITDA at Rs5.8B (-2% y/y;
flat q/q) vs. JPMe at Rs5.4B and Bloomberg consensus Rs5.1B driven by higherthan-
expected realization growth (+4% q/q vs. JPMe +1% q/q). However, higherthan-
expected operating cost/MT increase (+4% q/q) partly offset the ASP benefit.
PAT of Rs3.36B (-4% q/q; -6% y/y) in 2Q CY11 was also higher than JPMe and
consensus (Rs3.1B), driven by higher-than-expected other income. Tax rate for the
quarter at 31% was higher than JPMe at 28%.
Strong realization growth: ACC reported realization growth of +4% q/q and +5%
y/y, which was higher than our expectation of +1% q/q. The ASP growth, in our
view, was aided by ACC’s exposure to South India, fairly stable pricing in East India
and high exit prices in Mar. We expect the weak pricing trend seen from mid-May to
June in Central/West India to flow through 3Q CY11 given much of the sharp price
increase in 1Q was offset by price corrections in the recent months. The stable prices
in South India should provide some support to ACC in 3Q.
But operating cost increases too: Operating cost/MT for the Jun quarter increased
4% q/q (vs. JPMe +2% q/q) due to the 11% increase in emplyee cost/MT and +23%
in power cost/MT. Power costs increase was on account for higher coal price and
purchase power rates. Freight cost increased 5% q/q due to higher rail freight but
could see further increase as the fuel hike in end-Jun flows through from 3Q CY11.
EBITDA/MT in the quarter was Rs978/MT (+4% q/q) vs. JPMe at Rs910/MT.
Sept to be seasonally weak quarter: Given the seasonally slow monsoon period, we
expect volume and prices to decline in the 3QCY11. After the rains, we believe the
recovery in demand and level of supply discipline in large markets will be key to
pricing in 2H FY12. Operating costs are expected to remain elevated driving lower
profitability in 3Q CY11.
Valuation and risks to rating
We adjust our CY11/CY12 estimates modestly. ACC’s valuations at $136/MT
EV/MT CY11E and 9.5x EV/EBITDA is still at a premium to UTCEM’s $119/MT
and 8.1x FY12E. We continue to believe this premium is not warranted, and reiterate
our UW rating on ACC with a Jun-12 PT of Rs900 based on $120/MT CY12E
EV/MT. Our PT translates into EV/EBITDA multiples of 8.3x and 8.2x on CY11E
and 12E, respectively. Key risks to our PT and estimates are a sharp recovery in
cement demand and prices.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ACC and Ambuja
ACC.BO, ACC IN
Underweight
Price: Rs1,022.10
Price Target: Rs900.00
In-line earnings; near-term pressure given higher
costs, lower prices, and weak demand
UTCEM beat earnings on company-specific issues, while ACEM and ACC results
were broadly in-line, with higher-than-expected ASPs. Stocks have moved up
over the last few days on expectations of a price recovery after the rains in
Sept/Oct. While traditionally buying cement equities over Aug-Oct has made
money in the Nov-April period given that both demand and prices recover, we
believe that this year, with demand weakness, a price recovery would essentially
be driven by supply discipline, the sustainability of which is difficult to call.
Results broadly in-line for ACC, ACEM: ACC reported PAT of Rs3.4B vs
JPMe and BBRG consensus of Rs3.1B, while ACEM reported PAT of Rs3.5B
vs JPMe of Rs3.6B and BBRG consensus of Rs3.4B. EBITDA margins for both
the companies were slightly ahead of estimates mainly on higher ASPs. The
June quarter saw price declines pick up pace from mid-May. In terms of q/q
ASP change, ACC reported +4% (+5% y/y), ACEM+5% (+-6% y/y) and
UTCEM +9%, while EBITDA/MT for ACC stood at Rs978/MT (+4% q/q),
ACEM Rs1131/MT (+2% q/q) and for UTCEM Rs1221/MT (+22% q/q).
Stocks seem to be recovering, now what? Cost pressures (freight, energy)
should continue to move up from current levels. Seasonally Sept is the weakest
quarter with demand and prices correcting sharply given the rains (so far May-
July has seen a significant price correction of 10-20% across markets in North,
West and Central India). The only region where cement prices have held up is in
South India. Cement stocks over the past two weeks have outperformed the
markets given the macro weakness and the expectations of a price recovery after
the rains. On a relative basis, the large-cap cement stocks are debt-free, and
valuations do not appear demanding, but for a trade, we would wait for better
entry points. The medium-term outlook remains challenging given weak demand
and massive overcapacity (289MT capacity vs 210MT demand).
Do not rely on demand recovery for price recovery: Admittedly the base
would be more favorable from Oct onwards and y/y growth rates are likely to
improve from current levels (1Q FY12 industry dispatch growth rate stood at
0.4% vs our FY12 estimate of 7%); however, on the ground the situation
remains worrying, and for a meaningful demand recovery we need to see the
large cement markets such as UP+NCR (Central North) see a sharp recovery.
For cement prices to recover from here in North/Central/West India, we believe
supply discipline would be the key.
Post-rains demand recovery in UP the most critical, in our view, given
capacity commissioning: While demand is weak across most states, we
believe the most critical state is UP, which is India’s largest cementconsuming
state. Continued weakness there could lead to continued pricing
pressure in North/Central India.
Higher ASPs help earnings
ACC reported a better-than-expected 2Q CY11 with EBITDA at Rs5.8B (-2% y/y;
flat q/q) vs. JPMe at Rs5.4B and Bloomberg consensus Rs5.1B driven by higherthan-
expected realization growth (+4% q/q vs. JPMe +1% q/q). However, higherthan-
expected operating cost/MT increase (+4% q/q) partly offset the ASP benefit.
PAT of Rs3.36B (-4% q/q; -6% y/y) in 2Q CY11 was also higher than JPMe and
consensus (Rs3.1B), driven by higher-than-expected other income. Tax rate for the
quarter at 31% was higher than JPMe at 28%.
Strong realization growth: ACC reported realization growth of +4% q/q and +5%
y/y, which was higher than our expectation of +1% q/q. The ASP growth, in our
view, was aided by ACC’s exposure to South India, fairly stable pricing in East India
and high exit prices in Mar. We expect the weak pricing trend seen from mid-May to
June in Central/West India to flow through 3Q CY11 given much of the sharp price
increase in 1Q was offset by price corrections in the recent months. The stable prices
in South India should provide some support to ACC in 3Q.
But operating cost increases too: Operating cost/MT for the Jun quarter increased
4% q/q (vs. JPMe +2% q/q) due to the 11% increase in emplyee cost/MT and +23%
in power cost/MT. Power costs increase was on account for higher coal price and
purchase power rates. Freight cost increased 5% q/q due to higher rail freight but
could see further increase as the fuel hike in end-Jun flows through from 3Q CY11.
EBITDA/MT in the quarter was Rs978/MT (+4% q/q) vs. JPMe at Rs910/MT.
Sept to be seasonally weak quarter: Given the seasonally slow monsoon period, we
expect volume and prices to decline in the 3QCY11. After the rains, we believe the
recovery in demand and level of supply discipline in large markets will be key to
pricing in 2H FY12. Operating costs are expected to remain elevated driving lower
profitability in 3Q CY11.
Valuation and risks to rating
We adjust our CY11/CY12 estimates modestly. ACC’s valuations at $136/MT
EV/MT CY11E and 9.5x EV/EBITDA is still at a premium to UTCEM’s $119/MT
and 8.1x FY12E. We continue to believe this premium is not warranted, and reiterate
our UW rating on ACC with a Jun-12 PT of Rs900 based on $120/MT CY12E
EV/MT. Our PT translates into EV/EBITDA multiples of 8.3x and 8.2x on CY11E
and 12E, respectively. Key risks to our PT and estimates are a sharp recovery in
cement demand and prices.
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