Monday, February 13, 2012

>ACC: Profitability beats estimates on cost control

A revival in demand in South India, where ACC has the highestexposure, in Nov. and Dec. ’11 along with higher available capacity vs. 4QCY10 enabled ACC to achieve growth of 6% in dispatch volumes in 4QCY11 and also helped it to take price hikes of 20% YoY and 10% QoQ. Overall the 4QCY11 results were better than our estimates, helped by higher realizations and a tax provision write-back with profitability
turning out 8% ahead of estimate.

Demand in the cement sector has picked up since Nov. ’11 after a dismal FY11 and 1HFY12; prices are currently at peak levels while cost pressures are unlikely to be high in the short term. This should allow profitability of cement companies to be boosted further in the next couple of quarters in line with our view in our anchor report of Dec 8, 2011 (India Cement – Rock Solid). Price hikes in South India though may be limited from here for the short term as they are at their peak and companies are conscious of inviting government intervention with rapid hikes.

We use an EV/ton to replacement cost/ton valuation methodology and continue to value ACC at a 4.7% discount to its replacement cost of INR6,250/ton based on its 10-year historical average and expected midcycle level ROCE to arrive at our target price. At present though the stock is trading at a 24% premium to the replacement cost, which is unattractive, in our view.

Key result highlights:
 Realizations at INR4,223/ton in 4QCY11 rose 20% YoY and 10% QoQ above our estimate of INR4,132/ton, while volumes as reported earlier at 5.9mnT were up 6% YoY
 This helped net sales at INR24.9bn rise 27% YoY against our estimate of a 24% increase.
 Raw material cost per ton (INR666/ton) was up 32% YoY in line with our estimate.
 Power and fuel cost per ton (INR991/ton) was up 23% YoY again in line with our estimate, driven primarily by higher coal prices.
 Freight cost per ton at INR639/ton was up 24% YoY slightly above our estimate of INR615/ton.
 Like Ambuja Cements (ACEM IN), other operating expenses per ton (INR1,028/ton) surprised on the upside against our estimate of INR950/ton, rising 10% QoQ.
 Overall ACC has controlled costs well unlike Ambuja Cements and its profitability in terms of EBITDA/ton turned out at INR635/ton, up 70% YoY and 62% QoQ, ahead of our estimate of INR588/ton. 
 For CY11, EBITDA/ton was at INR718/ton down from INR734/ton in CY10.
 Below the EBITDA level, the company reported a large reversal of tax provision related to earlier years of INR2.3 bn, which related to negative tax cost of INR1.3 bn for 4QCY11. Even in 4QCY10 there was a reversal of tax provision though much smaller in amount.
 Adjusting for this, PAT in 4QCY11 would have beaten our estimate by 8.7%.
 The company believes investment in infrastructure will boost cement demand in CY12, although cost pressures could continue through higher raw material, fuel & power and freight costs.