Sell ACC: Contest of Costs With Volumes ::Ambit

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Contest of Costs With Volumes
ACC will be the only large cement major posting double-digit volume
growth in CY11 (v/s 3-4% industry volume growth). Whilst volumes will
drive revenues, a sharp rise in costs and declining realisations in most
regions will hit 2HCY11 operating profits. Higher dependence on
expensive domestic coal will lead to a much higher increase in raw
material costs versus peers, thus reducing ACC’s low cost advantage
compared with peers. On our estimates, the stock is trading at 10.5x 1-
year forward EV/EBITDA, which is closer to the peak valuations of the
last 5 years, despite the expected sharp drop in profitability ratios.
Competitive position: STRONG. Change to this position: STABLE.
ACC’s pan-India reach along with leadership in managing constraints and
industry leading financial operational strengths makes it the strongest cement
manufacturer alongside UltraTech in our competitive positioning. Holcim’s
operational support, over the years, has boosted ACC’s profitability, which is
the best in the industry on account of its lowest-cost structure in the industry.
2HCY11 volume growth to be lower than 1HCY11: After posting 14% YoY
volume growth in the Jan-July 2011 period, we expect the company to post
growth at a lower pace for the remaining months of the year, leading to 10%-
11% volume growth for CY11. Large contractors and marketing teams of
Southern cement manufacturers highlight that demand will remain low for
another couple of quarters. After higher-than-industry growth in CY11 for
ACC, we expect ACC’s volume growth to drop below industry growth in
CY12 (5%).
Upside to realisations limited: As demand growth over the next six months
disappoints and keeps capacity utilisation low, we expect realisation growth to
remain muted. However, the larger share of ACC’s sales from regions (other
than the disciplined South Indian region will keep realisation growth behind
that of peers. We expect realisation growth for ACC to be 5% in CY11.
Valuation: ACC is presently trading at 10.5x 1-year forward EV/EBITDA on
our EBITDA estimates (21% lower than consensus). Our CY12 EBITDA
estimates are lower than consensus on account of lower volume and
realisation growth expectations; our cost assumptions grow only by 2% on a
YoY basis in CY12. Whilst on EV/tonne the stock is trading in line with its last 5
year average (US$130/tonne), on 1-year forward EV/EBITDA, the stock is
trading at a 45% premium. We expect valuations to correct as EBITDA/tonne
continues to decline for CY11 and CY12 and profitability reduces materially;
we expect RoIC in CY12 to decline to nearly half of its levels in CY10 (40%).
Demand recovery and pricing discipline are the key risks.