Cost pressure to stay… • ACC's Q4CY14 :ICICI Securities, report

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Cost pressure to stay… • ACC's Q4CY14 operational performance was way below our estimates with muted topline growth along with a sharp margin contraction. On the other hand, tax credit of earlier years amounting to | 196.4 crore led to higher net profit for the quarter • Revenues grew 2.6% YoY to | 2762.3 crore (vs. I-direct estimate of | 2914.3 crore). Cement volumes for the quarter declined 1.5% YoY to 5.76 MT (I-direct estimate: 6.1 MT) while realisations increased 4.2% YoY to | 4796/tonne (I-direct estimate: | 4799/tonne) • On the margin front, the EBITDA margin declined to 6.6% (i.e. 315 bps lower than last year) due to higher raw material and employee costs, which increased 24.8% YoY and 23.6% YoY, respectively. The temporary ban of mining operations at Chaibasa and Bargarh plants also had a negative impact on the sales volume & margins • However, tax credit of | 196.4 crore pertaining to previous years led to net profit growth of 18.3% YoY to | 326.2 crore for the quarter Second largest player in industry with balanced regional mix ACC is the second-largest pan-India cement manufacturer with cement production capacity of 30 MT. The company has increased its capacity at 10% CAGR over the past five years. ACC’s market share declined from 13% to 10% over the past five years, as capacity expansions were backended. However, we expect its market share to increase, going forward, with stabilisation of new capacity. ACC’s regional mix is among the most balanced in the country while its key markets are the south and eastern regions, which together account for ~54% of volume sales. Capacity to increase to 35 MT by CY15E The company is replacing existing facilities at Jamul, Chhattisgarh with a clinker plant with capacity of 2.8 MTPA and local grinding capacity of 1.1 MT of cement. At the same time, ACC plans to increase the grinding capacity at Sindhri, Jharkhand by 1.35 MT of cement while a new plant with annual capacity of 2.7 MT is scheduled to be built in Kharagpur. Construction plans at both locations are progressing well. With their commissioning, the company's total cement production capacity is expected to increase to 35 MT by FY15E from the existing 30 MT. Margin expansion – key focus area for company ACC is still one of the higher cost producers due to high fixed costs structure and legacy plants. However, with proposed synergies from the Holcim restructuring, we expect efficiencies to improve, going ahead. ACC’s pet coke usage is likely to be 20% by next year. Similarly, usage of alternative fuel is expected to rise from the current 2% to 5% over the next 12 months. The 7.7 MW waste heat recovery facility is likely to be commissioned soon. The company is also focusing on increasing the volume of premium products to improve realisation. Cost pressure to stay; maintain HOLD We remain positive on the company due to its pan-India presence, strong balance sheet to withstand the current slowdown and its compelling valuations. However, we expect margins to continue to remain under pressure due to high cost pressure led by mining ban, higher proportion of inefficient plants. Hence, we maintain our HOLD rating with a target price of | 1635/share (i.e. valuing the stock at CY16E EV/EBITDA of 15.0x, EV/tonne of $140/tonne on CY16E capacity of 34.8 MT).


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http://content.icicidirect.com/mailimages/IDirect_ACC_Q4CY14.pdf