2QCY10 Results Update SECTOR: CEMENT ACC STOCK INFO. BSE Sensex: 18,113 S&P CNX: 5,442 BLOOMBERG ACC IN REUTERS CODE ACC.BO Previous Recommendation: Buy Buy Rs816 Equity Shares (m) 187.9 52-Week Range 1,017/686 1,6,12 Rel. Perf. (%) -9/-18/-21 M.Cap. (Rs b) 153.3 M.Cap. (US$ b) 3.3 Below estimates, impacted by lower than estimated volumes and higher cost push; downgrade EPS; maintain Neutral ACC s reported below estimate operating standalone performance with EBITDA margins of 27.4% (v/s est 29.2%) and PAT of Rs3.59b (v/s est Rs3.88b), impacted by lower volumes and higher than estimated cost push. Key highlights include: Volumes de-grew by 2.8% to 5.27MT. Realization improved by 1.8% QoQ (flat YoY) to Rs3,834/ton. Net sales declined by 2.9% to Rs20.2b (v/s est Rs20.15b). EBITDA de-grew by 25% YoY (~11% QoQ) to Rs5.53b, translating into 790bp YoY (~220bp QoQ) decline in margins to 27.4% (v/s est 29.2%). Profitability was impacted by ~Rs7/bag QoQ increase in cost, translating into Rs3/bag QoQ decline in EBITDA/Ton to Rs1,049/ton. Further, lower than estimated other income at Rs597m further restricted PAT to Rs3.59b (26% YoY decline). The board has recommended interim dividend of Rs10/share, as against Rs23/share in CY09. Valuation and view: We are downgrading our EPS estimates for CY10 by 3.4% to Rs73 and 3.7% for CY11 to Rs79.9, to factor in for a) increase in freight due to diesel price increase of 6% and b) higher other expenditure. The stock is valued at 10.2x CY11E EPS, 4.9x CY11E EV/EBITDA and US$80/ton (~30MT capacity). Maintain Buy with target price of Rs1,204 (~8x CY11E EV/EBITDA). Jinesh Gandhi (Jinesh@MotilalOswal.com); Tel: +91 22 3982 5416
Muted volumes results in flat revenues Volume de-growth of 2.8% to 5.27mt (v/s est 5.35mt). Realization improved by 1.8% QoQ (flat YoY) to Rs3,834/ton (v/s est Rs3,767/ton). As a result net sales declined by 2.9% to Rs20.2b (v/s est Rs20.15b). Volume growth continues to be muted due to capacity constraint and delay in commissioning of new capacity. ACC Concrete, a 100% subsidiary, reported 29% YoY growth in revenues to Rs1.64b. TREND IN CEMENT VOLUMES (M TON) & REALIZATIONS (RS/TON) Volume (m tons) Realization (Rs/ton) 3,325 3,375 3,571 3,499 3,587 3,840 3,931 3,585 3,767 3,834 5.4 5.3 4.9 5.5 5.7 5.4 5.0 5.4 5.6 5.3 1QCY08 2QCY08 3QCY08 4QCY08 1QCY09 2QCY09 3QCY09 4QCY09 1QCY10 2QCY10 Source: Company/MOSL whereas higher other expenditure impacts margins EBITDA de-grew by 25% YoY (~11% QoQ) to Rs5.53b (v/s est Rs5.89b), translating into 790bp YoY (~220bp QoQ) decline in margins to 27.4% (v/s est 29.2%). Profitability was impacted by ~Rs7/bag QoQ increase in cost (primarily other expenditure), translating into Rs3/bag QoQ decline in EBITDA/Ton to Rs1,049/ton (v/s est Rs1,100). Capitalization of new expansions at Orissa and Karnataka resulted in YoY increase in depreciation. Further, lower than estimated other income at Rs597m further restricted PAT to Rs3.59b (26% YoY decline). TREND IN EBITDA EBITDA (Rs M) EBITDA margins (%) 35.3 33.9 31.5 29.6 27.4 26.2 4,700 23.2 4,136 24.9 4,461 22.9 4,375 6,474 7,344 6,679 22.4 4,300 6,222 5,530 1QCY08 2QCY08 3QCY08 4QCY08 1QCY09 2QCY09 3QCY09 4QCY09 1QCY10 2QCY10 Source: Company/MOSL 2
TREND IN UNIT COST (RS/TON) 2QCY10 2QCY09 YOY (%) 1QCY10 QOQ (%) Net Realization 3,834 3,840-0.1 3,767 1.8 Expenditure Raw Materials 445 412 8.0 502-11.4 Staff Cost 202 179 12.9 161 25.7 Power 746 690 8.2 703 6.1 Freight 512 470 9.0 493 3.9 Purchase of Cement 56 46 23.0 48 17.8 Other Expenditure 823 689 19.5 745 10.6 Total Cost 2,785 2,485 12.1 2,652 5.0 EBITDA 1,049 1,355-22.6 1,115-5.9 Source: Company/MOSL New capacities to contribute from 3QCY10 It has commissioned its brownfield expansion at Orissa (~1.2MT) and Karnataka (~3MT), however these plants are yet to stabilize, whereas 3mt capacity at Maharashtra would commence operations by 3Q/4QCY10. After several delays, these plants are finally expected to stabilize and commission operations in 3QCY10. As a result, volumes are expected to benefit after witnessing decline since 4QCY09. After two years of muted volume growth, these new capacities are expected to drive robust volume growth of ~10% CAGR. RMC business continues to drag consolidated PAT ACC s RMC business, which was demerged into 100% subsidiary from 1/Jan/08, continues to make PBIT loss of Rs56m (v/s R123m in 2QCY09 v/s Rs89m in 1QCY10). While this business has been scaling-up well since last 9 months, with 29% YoY growth in revenues in 2QCY10 to Rs1.64b. RMC business had aggressively invested in building the business, but slow down in volumes has impacted profitability. The company has taken several initiatives to turnaround RMC business, and focus in now on profitability rather than growth, as reflected in deferring of all expansion plans. TREND IN RMC BUSINESS (RS M) -200-180 -204 Sales -67-123 PBIT -173-113 -89-56 -334 1,243 1,290 1,349 1,263 1,298 1,269 1,177 1,384 1,494 1,637 1QCY08 2QCY08 3QCY08 4QCY08 1QCY09 2QCY09 3QCY09 4QCY09 1QCY10 2QCY10 Source: Company/MOSL 3
The management believes that the company is well placed to add value to the parent in both the immediate challenging times and well into the future. While RMC business in CY09 is expected to contract with the slow down in the real estate sector, translating into pressure on realizations, the company is taking following steps to counter these pressures: Appointed Mr.Hans Fuchs as Managing Director from PT Holcim Indonesia, from July 2008, in place of Mr Sanjay Bahadur Extensive expansion plans have been put on hold for CY09 Focus on dedicated infrastructure projects to mitigate effects of real estate slowdown Focus on consolidating the existing business Grow volumes from the current base of available 38 batching plants as well as from dedicated onsite project solutions Cost savings in raw materials and reduction in costs through increased productivities in manpower and equipment Securing coal block for securing long-term supply of cost-effective energy ACC has entered into JV with Madhya Pradesh State Mining Corporation (MPSMC) for prospecting and mining four coal blocks with approximate mineable reserves of 200mt. The mines are expected to become operational in four to five years, and will provide costeffective long-term energy supply assurance. Also, ACC, in a joint venture (~14% stake) with five other partners, has been allotted a coal mine at Moira-Madhujore in West Bengal, which has geological reserves of 685mt. However, given 6 parties involved, it is difficult to ascertain timeline for commissioning. Downgrading estimates We are downgrading our EPS estimates for CY10 by 3.4% to Rs73 and 3.7% for CY11 to Rs79.9, to factor in for a) increase in freight due to diesel price increase of 6% and b) higher other expenditure. We maintain our cement price assumption of Rs10/bag QoQ increase in 3QCY10 and flat QoQ realizations in 4QCY10. For CY11, we are assuming Rs4/bag average increase in realizations. REVISED FORECAST (RS M) CY10E CY11E REV OLD CHG (%) REV OLD CHG (%) Net Sales 81,959 81,244 0.9 92,217 91,026 1.3 Net Profit 13,714 14,193-3.4 15,014 15,586-3.7 EPS (Rs) 73.0 75.5-3.4 79.9 82.9-3.7 Source: MOSL Valuation and view After two years of muted volume growth, ACC would witness robust volume growth of ~10% CAGR over next two years driven by new capacities. Allotment of coal blocks in MP (in JV with the state) and West Bengal (in consortium) offers option value. Improvement in ACC s assets earning power, coupled with completion of divestment of non-core businesses makes it attractive pure-play on cement offering truly pan-india presence. The stock is valued at 10.2x CY11E EPS, 4.9x CY11E EV/EBITDA and US$80/ton (~30MT capacity). Maintain Buy with target price of Rs1,204 (~8x CY11E EV/EBITDA). 4
ACC: an investment profile Company description ACC, part of Holcim group, is the largest standalone cement company in India with total capacity of 30m ton. It has pan-india presence with 16 plants. It is the oldest player in the Indian cement industry with ~10% market share. Key investment argument Market leader with strong national presence with overall market share of 10%. High sensitivity to cement prices as every Re1/bag increase in cement price would increase CY10E EPS by 2.1%. Focused on reducing power cost by setting up captive power plants. Key investment risks Very limited scope to increase production through blending as 85% of cement sold is blended. Limited scope to saving cost, as location restricts usage of imported coal to ~15%. Recent development Has recommended interim dividend of Rs10/share (v/s Rs23/share in CY09). Valuation and view The stock is valued at 10.2x CY11E EPS, 4.9x CY11E EV/EBITDA and US$80/ton (~30MT capacity). Maintain Buy with target price of Rs1,204 (~8x CY11E EV/EBITDA). Sector view Strong GDP growth, coupled with sustainable demand drivers, augurs well for cement demand growth We expect utilization and pricing to bottom out by 2HCY10, and gradual improvement thereafter. Next 6-9 months to witnessed increased level of volatility in cement prices. COMPARATIVE VALUATIONS ACC GACL ULTRATECH P/E(x) CY10E 11.5 13.8 13.7 CY11E 10.2 13.0 11.8 P/BV(x) CY10E 2.2 2.4 2.1 CY11E 2.0 2.2 1.8 EV/Ton (US$) CY10E 94 127 112 CY11E 80 120 101 EV/EBITDA(x) CY10E 6.2 8.4 7.2 CY11E 4.9 7.3 6.1 EPS: MOST FORECAST VS CONSENSUS (RS) MOST CONSENSUS VARIATION FORECAST FORECAST (%) CY10 79.9 72.0 11.0 CY11 102.0 80.9 26.1 TARGET PRICE AND RECOMMENDATION CURRENT TARGET UPSIDE RECO. PRICE (RS) PRICE (RS) (%) 816 1,204 47.5 Buy STOCK PERFORMANCE (1 YEAR) SHAREHOLDING PATTERN (%) JUN-10 MAR-10 JUN-09 Promoter 46.4 46.4 46.4 Domestic Inst 20.1 19.8 21.6 1,050 950 850 750 ACC (Rs) - LHS Rel. to Sensex (%) - RHS 12 0-12 -24 Foreign 13.2 13.0 11.1 Others 20.4 20.8 21.0 650-36 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 5
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