ACC - Q1CY12 Result Update - In-line results, maintain Sell - Centrum

ACC's Q1CY12 result was largely in-line with our estimates with Revenues at Rs28.6bn (vs. est. Rs28.7bn) and EBITDA at Rs6.2bn (vs. est. Rs6.1bn). EBITDA margin was at 21.6% against est. 21.3% primarily due to higher sales volume of 6.72mt (est. 6.71mt). Adjusted profit (adjusted for one time depreciation charges due to change in depreciation policy from SLM to WDV for captive power plants) at Rs3.9bn was 3.7% above our estimates primarily due to a) higher other income of Rs948mn (est. Rs750mn) and b) lower tax rate of 26.8% (est. 30%). Cement prices remained firm across the country and hence, realization improved 1.2% QoQ to Rs4,256/tonne (est. Rs4,264/tonne). Though, we have factored in higher cement prices for the company due to enduring sustainability of the cement price at higher levels across the country contrary to our expectation of pressure on cement prices due to lower utilization rate, the margins of the company is expected to remain suppressed due to mounting cost burdens. Rising operating cost/tonne (11.4% YoY increase in Q1) negated the benefits of significant increase in volume (9.1% YoY in Q1) and realization (10% YoY) and EBITDA margin declined 99bps YoY to 21.6%. Going forward, EBITDA margin is expected to be at 18.2% in CY12E and 17.7% in CY13E primarily due to the rise in input costs, much lower than peak-cycle average margin of 27.5% for the period CY06-CY09. Average RoE of the company is expected to be 16.8% in CY12E and CY13E compared to peak cycle RoE of 32.3% between CY06-CY09. We maintain Sell on the stock with a price target of Rs1,030, a downside of 17% from CMP.

Higher realization and volume results in improved profits: Higher domestic realization (up 10% YoY) and sales volume (up 9.1% YoY) resulted in 20% YoY growth in revenues to Rs28.6bn (0.2% lower than our estimates of Rs28.7bn). Higher realizations and volume led to 14.8% YoY increase in EBITDA to Rs6.2bn (est.: Rs6.1bn). EBITDA margin declined 99bps YoY to 21.6% (est. 21.3%) due to increase in energy and freight costs. Adjusted profit of the company increased 10.8% YoY to Rs3.9bn, 3.7% above our estimates of Rs3.7bn. EBITDA/tonne increased 5.2% YoY to Rs921/tonne (est. Rs908/tonne).

Increase in operating costs negate benefits of steep increase in realization: Operating costs went up 11.4% YoY led by 29.1% YoY increase in energy costs due to higher domestic coal prices and 13.6% YoY increase in freight costs due to higher railway freight rates and diesel price. Higher operating costs negated the benefits of realization and volume improvement and EBITDA margin declined 99bps YoY to 21.6%.

Higher realization does not seem to lead to margin expansion: Operating margin of the company was under pressure despite improvement in realizations due to rising input costs. We believe that higher input costs would lead to compression in operating margins going forward even though cement price is on an uptrend. We expect EBITDA margin of the company to be 18.2% for CY12E against 21.6% reported in Q1CY12.

Challenges persist, maintain Sell on stretched valuations: At the CMP, the stock trades at 17.1x CY13E EPS, 9.5x EV/EBITDA, 2.8x P/BV and EV/tonne of US$146.2. We maintain Sell on the stock with target price of Rs1,030, a downside of 17% from CMP.

Source : Equity Bulls

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