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AC's 1H11 EBITDA margin of Rs1,092/mt was solid, but we expect a fall to Rs800 in 2H11 as
cost pressures have escalated and prices weakened. Although AC's balance sheet is impressive,
its valuation looks rich (2011F EV/mt of US$161, a 22% premium to replacement cost) and we
maintain Sell; new TP Rs110.53.
Margin risks have increased in 2HFY11
In its call yesterday, AC’s management said its variable costs had risen significantly in 2Q11: coal
prices up 28% yoy, captive power generation costs up 16%, gypsum costs up 14% and freight
costs up 13%. The company’s average realisation in the quarter was Rs205/bag, but this
weakened from Rs212/bag at the start of the quarter to Rs190/bag at the end. Management said
it also witnessed further declines in markets such as Gujarat in July. We estimate EBITDA/mt of
Rs800 in 2H11, vs Rs1,092 in 1H11. Although this would present yoy growth from the low base in
2H10, we believe the risks are on the downside for margins.
Surplus conditions in the industry could be prolonged
Despite cement industry demand growth dipping in FY11 to 5.5%, this slipped even further to just
1% yoy in 1QFY12 (quarter ending June 2011). However, the industry estimates growth of 4-5%
for FY12, assuming a post-monsoon season recovery in demand. We expect capacity additions
of 20mmt in FY12, which should take industry capacity to 325mmt, vs demand of 225mmt. We
anticipate that oversupply conditions will continue into next year, given our expectation that
demand growth will remain lower than trend (8-10%) in both FY11 and FY12. We thus expect
cement margins to remain in the Rs800-900/mt range for the next two years.
Maintain Sell, with TP of Rs110.53
Following yesterday’s comments from management, we have adjusted our EPS estimates for
FY11 and FY12, introduced our FY13 EPS estimate of Rs8.51/share and raised our DCF-based
target price to Rs110.53. In our view, AC has an impressive balance sheet with free cash of
Rs27bn in FY11F and the ability to grow the business through acquisitions. However, on 2011F
EV/mt, the stock is trading at US$161, a 22% premium to replacement cost. Given the limited
earnings momentum we see in the near term, we maintain our Sell rating.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
AC's 1H11 EBITDA margin of Rs1,092/mt was solid, but we expect a fall to Rs800 in 2H11 as
cost pressures have escalated and prices weakened. Although AC's balance sheet is impressive,
its valuation looks rich (2011F EV/mt of US$161, a 22% premium to replacement cost) and we
maintain Sell; new TP Rs110.53.
Margin risks have increased in 2HFY11
In its call yesterday, AC’s management said its variable costs had risen significantly in 2Q11: coal
prices up 28% yoy, captive power generation costs up 16%, gypsum costs up 14% and freight
costs up 13%. The company’s average realisation in the quarter was Rs205/bag, but this
weakened from Rs212/bag at the start of the quarter to Rs190/bag at the end. Management said
it also witnessed further declines in markets such as Gujarat in July. We estimate EBITDA/mt of
Rs800 in 2H11, vs Rs1,092 in 1H11. Although this would present yoy growth from the low base in
2H10, we believe the risks are on the downside for margins.
Surplus conditions in the industry could be prolonged
Despite cement industry demand growth dipping in FY11 to 5.5%, this slipped even further to just
1% yoy in 1QFY12 (quarter ending June 2011). However, the industry estimates growth of 4-5%
for FY12, assuming a post-monsoon season recovery in demand. We expect capacity additions
of 20mmt in FY12, which should take industry capacity to 325mmt, vs demand of 225mmt. We
anticipate that oversupply conditions will continue into next year, given our expectation that
demand growth will remain lower than trend (8-10%) in both FY11 and FY12. We thus expect
cement margins to remain in the Rs800-900/mt range for the next two years.
Maintain Sell, with TP of Rs110.53
Following yesterday’s comments from management, we have adjusted our EPS estimates for
FY11 and FY12, introduced our FY13 EPS estimate of Rs8.51/share and raised our DCF-based
target price to Rs110.53. In our view, AC has an impressive balance sheet with free cash of
Rs27bn in FY11F and the ability to grow the business through acquisitions. However, on 2011F
EV/mt, the stock is trading at US$161, a 22% premium to replacement cost. Given the limited
earnings momentum we see in the near term, we maintain our Sell rating.
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