ACC - Lower realization leads to lower margins, improvement seen ahead - Centrum

ACC's Q3CY12 result was below our estimates primarily due to a) 1.4% QoQ decline in realization against our expectation of 1% QoQ increase and b) lower other income of Rs840mn (vs. est. Rs1,200mn). The company reported EBITDA margin of 17.8% vs. est. 19.5% and adj. profit of Rs2.48bn (vs. est. Rs3.1bn). Going forward, with our expectation of demand improvement and an uptick in utilization rate of the industry, we believe manufacturers will enjoy the pricing power which would help in improvement in operating margins. We expect utilization rate of the industry to improve to ~81% by FY15E against ~76.5% in FY13E, which is expected to result in volume growth for manufacturers. We expect cement demand growth of ~7% in FY13E and 8-9% in FY14E driven by demand from housing, infrastructure and real estate sectors. Our interaction with dealers indicates ~2% M-o-M increase in retail price in October after the price decline in August and mid-September. We expect realization to improve ~2-3% QoQ in Q4CY12E and hence, earnings should improve going forward. We maintain Buy on the stock with price target of Rs1,683, upside of 18.8% from its CMP.

- Numbers below estimates led by lower-than-estimated realization and other income: ACC's Q3CY12 numbers were below estimates primarily due to lower than expected realization of Rs4,527/tonne (vs. est. Rs4,637/tonne) and lower other income of Rs840mn (vs. est Rs1,200mn). Lower-than-estimated realization resulted in EBITDA margin of 17.8% (vs. est. 19.5%) and PAT was at Rs2.48bn (vs. est. Rs3.1bn).

- Higher realization helps to post better results: Revenue increased 13.7% YoY to Rs24.4bn driven by 19.8% YoY increase in realization to Rs4,527/tonne. Cement sales volume was down 5.1% YoY to 5.4mt. Better realizations led to 97.3% YoY increase in EBITDA to Rs4.35bn and adjusted profit increased 102.4% YoY to Rs2.5bn.

- Steep increase in realization offsets the rise in operating costs and helps margin expansion: Operating cost/tonne increased 9.7% YoY led by 24.3% YoY increase in raw material costs, 5.1% YoY increase in employee costs, 8.8% YoY increase in freight cost, 8.1% increase in energy cost and 10.8% YoY increase in other costs. Despite 9.7% increase in op. costs, op. margin expanded 7.5pp YoY to 17.8% primarily due to significant increase in realization. Operating profit/tonne increased 107.9% YoY to Rs806.

- Maintain Buy on the company on improving fundamentals: With our expectation of improvement in effective utilization rate for the industry, we believe that cement manufacturers will be able to enjoy better pricing power. Government's reform push and increase in infrastructure investments in XIIth five year plan is also expected to aid volume growth for the industry. We expect earnings of the company to grow at a CAGR of 24.4% over CY11-CY15E. In 9 months ended Sept-12, earnings of the company improved 31.6% YoY and we expect earnings to grow by 31.4% in CY12E. Improvement in earnings will lead to higher RoE, which is expected to increase to 22.4% by CY15E against 15.4% in CY11. At the CMP, the stock trades at 14.9x CY13E EPS, 8.5x EV/EBITDA and EV/tonne of US$159.2. We maintain Buy on the stock with price target of Rs1,683, upside of 18.8% from CMP.

Source : Equity Bulls

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