>ACC (EMKAY)

Stellar Performance

ACC Q1CY2009 pre-exceptional net profit at Rs4.08 bn is sharply ahead of our estimates (Rs3.40bn) on account of lower than expected other expenditure and lower Power and Fuel cost. Revenue for the quarter grew by 14.4% to Rs20.5bn, driven by 6.1% improvement in cement volumes (5.73mnt) and 7.9% increase in realizations to Rs3587 per ton. Sequentially realisation improved by Rs106/ton or 3%. Pre-exceptional EBIDTA (adjusting for a write back Rs197 million of reduction in value of actuarial liabilities) for the quarter was up 33.4% yoy to Rs6.28bn (our estimate of Rs5.31bn) while EBIDTA margins increased by 433 bps yoy to 30.5%, mainly on account of lower other expense. Sequentially P&F cost was down 14% reflecting the huge fall witnessed in international coal prices and thereby helping a sequential declined of 6.3% in total cost to Rs2491/ton. On account of strong dispatches, higher realizations and dramatic fall in international coal prices and other operating costs, we had recently upgraded our earnings estimate for ACC by 17% for CY09E to Rs59.5. We are further upgrading our earnings by 7.3% to Rs63.8 per share for CY2009. At current levels, the stock is trading at 10.1x CY09E earnings and USD79.9 EV/ton. We rate ACC as our top pick in sector and maintain our BUY recommendation on the stock with a price target of Rs697.

Note:

1) The reported result by the company includes write back on account of decrease in gratuity liability by Rs197 mn, which has occurred on account of change increase in discounting rate (G-Sec yields) sequentially for valuation of present value of employee benefit liabilities as per AS-15. We believe based on principle of conservatism these adjustments should have been done at the end of year. Also with the recent fall in G-sec yield this write back is likely to get reverse again. Hence we have added back Rs197 million to staff cost.

2) The State of Uttar Pradesh introduced VAT effective from January 1, 2008 pursuant to
which, sales tax exemption benefit was converted into a deferral scheme. Hence ACC’s reported net sales were lower by Rs 275.6 million for the quarter ended March 2008 and lower by Rs278.4 mn for quarter ended June 2008. Subsequently on representation by cement companies to restore sales tax benefit scheme, the State of Uttar Pradesh promulgated an ordinance during September 2008 restoring the sales tax exemption benefit. Consequently ACC net sales for quarter ended September 2008 included sales tax benefit of Rs 554 million for the period January to June 2008. For a like to like comparison we have added Rs275.6 million to Q1CY2008 net sales and shown like to like comparison on a per ton basis separately.

Results Highlights

■ ACC revenues for the quarter grew by 14.4% yoy to Rs20.55 bn on account of 6.1% increase in cement volumes (5.73mnt) and 7.9% increase in realizations to Rs3587 per ton. Sequentially realisation improved by Rs106/ton or 3%. Adjusting for note 2 mentioned above realisation improved 6.2% yoy.

■ Pre-exceptional EBIDTA at Rs6.28bn witnessed an increase of 33.4% yoy and was significantly ahead of our expectation (Rs5.31bn) mainly on account of lower than estimated other expense (Rs3.54bn as against our estimate of Rs4.1bn) and lower Power & Fuel cost (Rs718/ton against our estimate of Rs799/ ton).

■ EBITDA per ton on a yoy basis has witnessed an increase of 25.7% while the same on a sequential basis is up by a huge 33.5% to Rs1096 per ton. EBITDA margin for the quarter improved by 433bps yoy to 30.5% which was higher than our estimate of 26.3%.

■ Other expenses were down 11.5%yoy as last year expenses included approximately Rs250-300 of one time consulting fees relating to implementation of SAP and alternate fuel research. Also post February 2009 cement companies in Western and Eastern regions had cut rebates and discounts to dealers. This also has contributed to reduction in other expenditure for ACC.

■ Despite an 18% increase in Power and fuel cost (per ton Rs718) and 7.5% increase in Freight (Rs485/ton) ACC has management to restrict its total cost to Rs2491 i.e. an increase of just 1.5%. On a sequential basis it has actually declined by 6.3%.

■ However on a qoq basis, ACC power & fuel cost came down 13.7% reflecting the huge fall witnessed in international coal prices (ACC imports around 15% of its coal requirements). The benefit could have been much higher but for ACC carrying some high cost international coal inventory.

■ Interest cost was up 157.6% yoy to Rs144mn (we have treated Rs224mn interest provision on late payments of royalty on limestone as extraordinary exp) while depreciation charge was up 10.6% yoy to Rs789mn.

■ Consequently PBT for the quarter witnessed a growth of 27.4% yoy to Rs5.85bn. Pre exceptional net profit at Rs4.08bn up 24% yoy was significantly higher than our estimate of Rs3.40bn. The reported net at Rs4.04 bn was up 13.2% yoy (Q1CY2008 includes Rs368 mn on account of profit on sale of its investments in subsidiary)

To see full report: ACC