>ACC: Q2CY12 Results

Stellar performance, Upgrade to Neutral


ACC’s Q2CY12 result was sharply above estimates driven by strong realization increase of 7.9% QoQ against our expectation of 2.5%. EBITDA margin was at 23.4% against est. 20.5% driven by better-than-expected realization and adjusted profit was at Rs4.2bn vs. est. Rs3.3bn. Going forward, with our expectation of demand improvement and an uptick in utilization rate of the industry, we believe manufacturers will be able to pass on the increase in input costs to consumers and will be able to maintain operating margins. In Apr-May ’12, the industry recorded despatches growth of 9.6% against 0% in the same period last year. We expect cement demand to grow at 8-9% in FY13E and FY14E. Over the last one year, cement prices have sustained at higher levels and the industry ensured price hikes despite lower utilization
rates which compensated for increase in operating costs (freight, energy and raw material) and resulted in expansion of operating margins. Our interaction with dealers indicate ~2.5% M-o-M increase in retail price in July which is likely to protect the margins in the coming quarter even if the monsoon peaks (historically, we have seen a correction in cement prices during the monsoons). We have revised our realization assumption by 4.8%/5.2% for CY12E and CY13E to factor in improvement in retail prices, which resulted in EPS upgrade of 25.9%/24.9% for CY12E/CY13E. Consequently, we revise our rating on the Stock from Sell to Neutral with a price target of Rs1,413, upside of 12% from its CMP.


Steep realization increase results in higher profits and helps to beat estimates: Steep increase in realization (up 13.3% YoY against est. 7.7% YoY increase) resulted in 15.6% YoY increase in Revenues to Rs27.8bn (vs. est. Rs26.5bn). Cement sales volume was up 2% YoY to 6.05mt. Higher realization and sales volume led to 18.3% YoY growth in EBITDA to Rs6.5bn.



Better realization negates the benefit of input cost hike and results in margins expansion: Operating costs increased 12.5% YoY led by 9.9% YoY increase in raw material costs, 9.7% YoY increase in employee costs and 19.2% YoY increase in freight costs due to the increase in railway freight rates in March ’12. Despite 12.5% increase in op. costs, op. margin expanded 53bps YoY to 23.4% primarily due to 133% YoY increase in realization. Op. profit/tonne increased 15.9% YoY (and 17.3% QoQ) to Rs1,076/tonne.


Upgrade earnings estimates due to higher realizations: Cement prices are on an increasing trend and our dealers’ interaction suggests ~2.5% M-o-M increase in pan-India average retail prices. We have revised our realization assumption by 4.8%/5.2% for CY12E and CY13E to factor in improvement in retail prices, which resulted in EPS upgrade of 25.9%/24.9% for CY12E/CY13E.


Upgrade to Neutral on improving valuations: Cement manufacturers have been to able to pass on the rising input costs and maintain/improve their op. margins over the last one year despite lower utilization rates. With our expectation of improvement in utilization rates over the next two years, we do not see any risk to pricing power of manufacturers which will result in improved earnings scenario. At the CMP, the stock trades at 13.9x CY13E EPS, 7.6x EV/EBITDA and EV/tonne of US$143.1. We upgrade our rating on the stock to Neutral from Sell earlier with a revised price target of Rs1,413 (earlier: Rs1,030), upside of 12% from its CMP.

RISH TRADER