Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ACC (ACC)
Cement
Peak trading multiples not factoring potential earning pitfalls. At 17X CY2012E
earnings and 9.2X EV/EBITDA, the ACC stock price is not taking cognizance of potential
pitfalls to our judicious earnings assumptions from (1) continued demand-supply
imbalance, (2) higher input costs, and (3) any possible regulatory action from the
Competition Commission. We maintain our SELL rating and target price of Rs980/share
as we continue to remain watchful of the continued risks to earnings for the industry.
Reported net income boosted by write-backs, operating profits miss estimates
ACC reported net sales of Rs21.5 bn (31% yoy, -11% qoq), operating profit of Rs2.2 bn (30%
yoy, -60% qoq) and net income of Rs1.7 bn (68% yoy, -50% qoq) against our estimate of Rs21.3
bn, Rs2.8 bn and Rs1.6 bn, respectively. While volumes (5.7 mn tons) and realization (Rs3,779/ton)
were broadly in line with our estimates, higher-than-estimated raw material and overhead costs
led to an EBITDA miss of 21%. Net income beat was primarily on account of higher other income
arising out of Rs617 mn of incentives and write-back of prior-period sales tax. Adjusted for the
write-back (net of taxes), net income of Rs1.2 bn was 21% lower than our estimate. We discuss
key highlights of the result in detail in a subsequent section.
Weak operating environment and potential CCI probe pose imminent earnings risk
In our view, the current market price of ACC does not factor the imminent earnings risks from (1)
weak demand environment leading to a potential disruption of the ’pricing discipline‘ and (2)
potential intervention by the Competition Commission of India (CCI). We note that ACC’s aheadof-
industry volume growth (15% YTD against 3.2% for industry) is primarily on account of low
base and ramp-up of capacities in CY2010, effect of which is likely to wane in CY2012E. Further,
the ’pricing discipline‘ which has allowed for sustenance of cement prices despite sluggish demand
could be put to test in an event of any potential intervention by the CCI.
Post-monsoon revival in prices a seasonal trend, euphoria not justified
Cement prices in ACC’s key markets of North and Central India corrected sharply by Rs15-20/bag
with the onset of monsoon yielding a 7% sequential decline in average realization. Our channel
checks suggest a revival in cement prices across regions, which is in line with general seasonal
trend of price hike going into the peak construction season. We note that our estimates do factor
a Rs15/bag sequential increase in prices in 4QCY11E and Rs10/bag yoy increase in CY2012E and
see limited upside to our realization assumptions. We note that the current market price implies a
realization growth of 11% (Rs22/bag) in CY2012E (assuming a mid-cycle multiple of 7X CY2012E
EBITDA).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ACC (ACC)
Cement
Peak trading multiples not factoring potential earning pitfalls. At 17X CY2012E
earnings and 9.2X EV/EBITDA, the ACC stock price is not taking cognizance of potential
pitfalls to our judicious earnings assumptions from (1) continued demand-supply
imbalance, (2) higher input costs, and (3) any possible regulatory action from the
Competition Commission. We maintain our SELL rating and target price of Rs980/share
as we continue to remain watchful of the continued risks to earnings for the industry.
Reported net income boosted by write-backs, operating profits miss estimates
ACC reported net sales of Rs21.5 bn (31% yoy, -11% qoq), operating profit of Rs2.2 bn (30%
yoy, -60% qoq) and net income of Rs1.7 bn (68% yoy, -50% qoq) against our estimate of Rs21.3
bn, Rs2.8 bn and Rs1.6 bn, respectively. While volumes (5.7 mn tons) and realization (Rs3,779/ton)
were broadly in line with our estimates, higher-than-estimated raw material and overhead costs
led to an EBITDA miss of 21%. Net income beat was primarily on account of higher other income
arising out of Rs617 mn of incentives and write-back of prior-period sales tax. Adjusted for the
write-back (net of taxes), net income of Rs1.2 bn was 21% lower than our estimate. We discuss
key highlights of the result in detail in a subsequent section.
Weak operating environment and potential CCI probe pose imminent earnings risk
In our view, the current market price of ACC does not factor the imminent earnings risks from (1)
weak demand environment leading to a potential disruption of the ’pricing discipline‘ and (2)
potential intervention by the Competition Commission of India (CCI). We note that ACC’s aheadof-
industry volume growth (15% YTD against 3.2% for industry) is primarily on account of low
base and ramp-up of capacities in CY2010, effect of which is likely to wane in CY2012E. Further,
the ’pricing discipline‘ which has allowed for sustenance of cement prices despite sluggish demand
could be put to test in an event of any potential intervention by the CCI.
Post-monsoon revival in prices a seasonal trend, euphoria not justified
Cement prices in ACC’s key markets of North and Central India corrected sharply by Rs15-20/bag
with the onset of monsoon yielding a 7% sequential decline in average realization. Our channel
checks suggest a revival in cement prices across regions, which is in line with general seasonal
trend of price hike going into the peak construction season. We note that our estimates do factor
a Rs15/bag sequential increase in prices in 4QCY11E and Rs10/bag yoy increase in CY2012E and
see limited upside to our realization assumptions. We note that the current market price implies a
realization growth of 11% (Rs22/bag) in CY2012E (assuming a mid-cycle multiple of 7X CY2012E
EBITDA).
No comments:
Post a Comment