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Spark Capital: ACC 4QCY12 result reviews




Spark Capital Advisors(India) Private Limited


11 Feb 2013





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ACC: Disappointing quarter on price drop; Expect pricing power to sustain. Maintain BUY ACC reported weak set of 4QCY12 results with volumes growing by a paltry 1% to 5.94mt. Realisations/t grew by 5% y-o-y compared to cost/t inflation of 9%, thereby reporting margin drop and EBITDA/t falling from Rs. 662/t in 4QCY11 to Rs. 527/t. CY12 actual realisations grew by 12% with EBITDA margins came in at 17.7%. Cement companies have demonstrated significant rationality on prices over the past few quarters despite a subdued demand environment and low utilisation. However cement prices came under pressure across India in Nov-Dec12 (Severe winter, weak demand, price discipline break-down in Andhra). Channel checks indicate prices have been hiked in Jan and Feb-13 across regions. We pencil a 5-6% cement price increase in FY14, largely premised on demand growth recovery (from 5-6% in FY13E to 7-8% in FY14E). We cut our CY13E and CY14E cement EBITDA estimates by 18% and 15% to incorporate the price fall in 4QCY12, royalty and cost inflation in raw material and fuel & freight costs. We have consolidated RMC business incorporating the merger. ACC is trading at 6.6x CY14E EBITDA. Our target price of Rs. 1,460/- is based on 8.5x CY14E EV/EBITDA Key takeaways from the result: Volumes: CY12 volume growth of 1.6% y-o-y was disappointing and lower than Ambuja’s 2.5%. ACC’s Southern presence and base effect could be the key reason. ACC grew by 13% in CY11 v/s ACEM’s 5.7% growth in CY11. Realisations: ACC’s realisations grew by 12% in CY12 to Rs. 4,358/t, mainly driven by strong pricing trends in the East, West and South markets, Realisation de-grew by 1.6% in 4QCY12 and was up by 5% y-o-y. Cost inflation: Total costs/t in CY12 increased by 12% y-o-y to Rs. 3,543/t. Freight cost rose sharply by 22% y-o-y due to rail tariff hike of ~22% in Mar-12. This was due to ACC’s 55% rail exposure and higher power & fuel costs. Royalty: ACC’s board approved the payment of “Technology and Know-how’ fees to Holcim at 1% of sales w.e.f. CY13.The fee is fixed for two years. ACC paid 0.64% of sales (Rs. 606mn) in CY11. Efficiency improvement in progress: Although ACC lags its Pan-India peers in cost efficiency. However its recent initiatives like higher blending, optimising fuel mix (usage of alternative fuel), lower power consumption, installation of Waste Heat recovery plants and rationalisation of fixed costs will improve its profitability over the next few years. Capex plans: ACC’s next leg of capacity expansion is in East at its existing Jamul site in Chhattisgarh and Sindhri in West Bengal. Total capacity will increase from 30mt to 34mt by 2HCY15. Total capex planned is ~Rs. 33bn

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