Tuesday, December 8, 2009


Testing times ahead
The company expects all India cement consumption growth to hover at around 9% over the next two years. However, oversupply would keep cement prices under pressure, which should bottom out during 2HCY10. With ACC’s capacity expansions facing delays of over 6 months, the company would find it increasingly difficult to raise volumes due to intense competition. We lower our CY10E earnings for the company by 29% on estimated 2.8% lower volumes and 5.3% lower cement
realization in the wake of recent sharper-than-expected correction in cement prices. Reiterate Sell with a cut in target price to Rs590 (Rs707), a 26% downside from current levels.

Cut CY10 EPS by 29s% and introduced CY11E: We cut CY10E EPS by 29% to Rs47.5 to factor in estimated 2.8% lower volume, 5.3% lower realization and 10% increase in coal price by Coal India. On our newly introduced CY11 numbers, we estimate EPS of Rs37.5.

Oversupply to impact prices, H2CY10 could be worse: Though the industry is expected to witness demand CAGR of 9%, over next two years oversupply would keep cement prices under pressure which should bottom out in H2CY10. We expect utilization levels to fall from 84% in FY10 to 76% in FY11, with minor improvement in FY12 to 78%.

Market mix worsens post expansion, Delays to impact volume growth: Shift in ACC’s market mix towards structurally surplus southern and western zones would impact ACC realization post its 6mn mt expansions in Karnataka and Maharashtra. Besides, delays in project execution would make it increasingly difficult for ACC to regain market share from competition.

Maintain Sell with cut in target price to Rs590 (vs Rs707 earlier): The stock currently trades at CY10E and CY11E P/E of 16.8x and 21.4x, EV/EBITDA of 8.2x and 8.6x and P/BV of 2.33x and 2.23x. Its assets are valued at US$106/tonne and $100/tonne on CY10E and CY11 capacity of 30.5mt. Reiterate Sell with a revised target price of Rs590 (valued at 1.72x CY10 P/BV, 20% premium to ACL FY03 Average P/BV). At our target price the stock would be valued at a PE of 12.4x, EV/E of 6X and EV /ton of $78.

To read the full report: ACC