>ACC: Continued cost pressures and fears of CCI imposing fine on cement companies

■ Revenues of the company during Q1CY12 grew by 19% YoY primarily due to improved cement realizations during Q1CY12 as well as higher sales volume.


■ Operating margins witnessed an improvement sequentially led by cement price hikes and stood at 21.5% for Q1CY12 as against 15.56% in Q4CY11. However due to higher costs, margins remained lower than
Q1CY11.


■ Net profit registered a decline of 56% for Q1CY12 due to higher depreciation charge on change in the depreciation policy for captive power plants.


■ At current price of Rs 1248, stock is trading at 19.4x P/E and 8.9x EV/ EBITDA multiples on CY12 estimates. Stock has corrected by nearly 10.5% since our last recommendation due to steep valuations, continued cost pressures and fears of CCI imposing fine on cement companies. Based on high valuations, we continue to maintain REDUCE recommendation on the company with a revised price target of Rs 1235 (Rs 1246 earlier) and would look for better entry points to invest in the stock if demand and pricing scenario remains strong.




Revenue growth led by price hikes and volume growth
■ Revenues of the company during Q1CY12 grew by 19% primarily due to improved cement realizations during Q1CY12 as well as higher sales volume.
■ Dispatches of the company stood at 6.72 MT in Q1CY12 as against 6.16 MT in Q1CY11, showing a growth of 9.1% on YoY basis. Dispatch growth is expected to remain steady going ahead with improvement in demand. We thus expect dispatches to grow by 9% to 26MT in CY12 for the company.
■ Stubborn pricing discipline led to healthy improvement in average cement realizations for the company. Cement realizations stood at Rs 4256 per tonne during Q1CY12 as against Rs 3893 per tonne during Q1CY11. Demand has also started recovering in most parts of the country resulting in increase in cement prices during Q1CY12. Companies have also passed on hike in excise duties and railway freight to the end users. Though marginal correction in cement prices is being witnessed now in some regions, we expect cement prices to remain firm for Q2CY12 and expect it to witness correction from June, 2012 onwards with
impact of higher supplies as well as monsoons.
■ We thus maintain our revenue estimates. We expect volumes to grow to 26MT in CY12 and expect pricing to improve by 10% in CY12 in comparison with CY11.


Margins down on yearly basis due to continued high cost pressures
■ Operating margins witnessed an improvement sequentially led by cement pric hikes and stood at 21.5% for Q1CY12 as against 15.56% in Q4CY11.
■ EBITDA/tonne during the quarter stood at Rs 917 per tonne as against Rs 900 per tonne during Q1CY11. However, on a sequential basis, EBITDA per tonne has improved as against Rs 654 per tonne witnessed during Q4CY11 due to improvement in cement prices, decline in staff cost and other expenditure per tonne.
■ On yearly basis, raw material costs per tonne moved up due to higher fly ash and gypsum prices. Power and fuel costs also moved up due to increase in production as well as higher prices of coal coupled with increase in purchased power tariff. Power and fuel costs are likely to remain high going forward also. For the full year, freight costs moved up due to increase in freight rates as well as sales volumes.
■ We maintain our estimates and expect EBITDA/tonne of Rs 859 for CY12, translating into operating margins of 19.9% for CY12.

Net profit performance impacted by one-time write-off related to depreciation
■ Net profit registered a decline of 56% for Q1CY12 due to higher depreciation charge on change in the depreciation policy for captive power plants.
■ During the quarter, company has recognized an additional depreciation charge of Rs 3.4 bn since it changed the method of providing depreciation on captive power plants from 'Straight Line' to 'Written Down Value' method with retrospective effect. Adjusted with this, net profit would have been Rs 3.8 bn as
against our estimate of Rs 3.9 bn.
■ We tweak our estimates to incorporate these one-time charges and expect net profits to be around Rs 12 bn for CY12(against Rs 13.4 bn earlier)


Valuation and recommendation
■ At current price of Rs 1248, stock is trading at 19.4x P/E and 8.9x EV/EBITDA multiples on CY12 estimates.
■ Stock has corrected by nearly 10.5% since our last recommendation at Rs 1389 due to steep valuations, continued cost pressures and fears of CCI imposing fine on cement companies.
■ Based on high valuations, we continue to maintain REDUCE recommendation on the company with a revised price target of Rs 1235 (Rs 1246 earlier) and would look for better entry points to invest in the stock if demand and pricing scenario remains strong.




RISH TRADER