>ACC: C1Q10: A Strong Quarter (MORGAN STANLEY)

Quick Comment – Impact on our views: ACC reported C1Q10 standalone earnings at Rs4bn (flat YoY), ahead of consensus and our estimate. The earnings beat was driven by mix of higher than expected realization and lower cost. In our view realization will remain flattish / improve marginally while costs would see some uptick in the near term. We expect margins to remain broadly stable. Volumes were down 3% YoY and we expect volume progression to remain muted in C2010 given delay in ACC’s new plants.

We remain positive on the sector given our view that robust demand and modest increase in effective capacity will support near term prices. While increasing costs is a risk, we expect margins to remain stable supported by stable / increasing realization.

What’s new: ACC reported 2% YoY and 9% sequential growth in revenues to Rs21bn. EBITDA grew ahead of revenues on sequential basis at 44% to Rs6.2bn aided by 720bps margin expansion (part of this was driven by other expenses which is seasonal in nature). On a YoY
basis however, margin contracted by 190bps on account of higher cost – material and other expenses. PAT was flat YoY but grew 44% sequentially driven by robust EBITDA growth.

Key Result Highlights Are:
Realization improved 5% sequentially, ahead of our estimates. ACC’s realization improved 5% YoY and QoQ (it had declined by 9% QoQ in Dec-09 quarter) to Rs3767/T and is only 4% below the peak in Sep-09. In our view, exit realization was around 2-3% higher than this. However, volume progression was muted having declined 3% YoY to 5.65mnT leading to muted revenue growth of 2% YoY. Going ahead, we believe revenue progression will be under pressure given our estimate of muted volume growth.

Costs were lower than expected; likely to rise going ahead: ACC’s costs on a per ton basis declined 5% sequentially against our expectation of 4% decline. The key highlight however was sequential decline in per ton power (5%) and freight cost (1%). We believe this was driven by lower clinker production and lead distance, respectively. In our view, this is unlikely to sustain and we expect some uptick in costs in ensuing quarters. In near term though margins are likely to be maintained given strong cement price trend.

To read the full report: ACC