Associated Cements Don’t associate at this price ::Macquarie Research

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Associated Cements
Don’t associate at this price
Event
 Sell – negative triggers ahead: Taking stock post the release of its CY11
annual report, building in higher cement prices and costs, we believe that
ACC looks quite expensive. We have cut our earning estimates by 16-27%
over the next three years but maintain our target price as we roll forward.
Expect penalties by Competition Commission of India (CCI) and cement price
decline in monsoon season to be key negative triggers ahead. Maintain
Underperform.
Impact
 Valuations – building in perpetual margin expansion by 13%: Our DCF
analysis shows that at 7% volume growth assumption, ACC current stock
price is factoring in EBITDA/t improvement by around 13% pa. We think this is
a very aggressive assumption given the oversupply in the market.
 Our assumptions remain optimistic: We are building in 10% volume growth
for CY12 and also building in higher EBITDA per ton of Rs771 or Rs63/t
higher YoY. This is based on the assumption that the current pricing discipline
in the industry should continue.
 But consensus is even higher: Consensus forecasts remain 4% and 8%
higher than our estimates for CY12 and CY13, respectively. It does appear
that consensus has built in the cement price hikes but is severely
underestimating the cost increase.
 Penalty by Competition Commission could take away 50% of net profit:
We believe that CCI is in last stages of completing the enquiry against the
cement companies and most probably will announce penalties in next month
or so. Based on recent trends, it is likely to be 6-7% of total revenue or around
50% of Net Profit.
Earnings and target price revision
 We are reducing our estimates by 16%19%/27% for CY12/13/14,
respectively.
Price catalyst
 12-month price target: Rs799.00 based on a DCF methodology.
 Catalyst: Penalty by CCI possibly in April and cement price declines by June.
Action and recommendation
 Maintain Underperform: ACC is trading at 20x CY2012E PER which is at the
higher end of the historical range, which seems expensive as it is based on
pricing discipline being maintained. Also it is factoring in the possibility of
margin expansion which we think looks unlikely. We recommend investors
book profits and wait for cement price correction to buy for possible dividend
yield.