ACC - Return of the up-cycle; ACC earnings set to soar - IIFL

Cement dispatch growth for the last four quarters has been strong bridging the gap between supply and demand which has been created since FY10. In addition, pace of order placement for new capacity has not picked up on account of 1) delays in securing the necessary clearances for limestone/land, 2) poor utilization of plants in south and 3) lower return on incremental capacity. Utilization rate, which dipped to 77% in FY12 (due to addition of 90mtpa over FY09-12 from base of 210mtpa), is expected to recover to 81-85% levels by FY15 as supply surplus declines. Historically, prices have improved during high utilization periods, indicating an up-cycle in the sector. We believe ACC will be a key beneficiary of this up cycle with earnings set for an 18.5% cagr over CY11-14 as against 4.4% cagr in CY08-11.

Realisation to improve 12% over CY12-14

Cement realizations have improved after a small correction during the last week of November 2012. The price correction has been limited to north, west and central regions. South has surprisingly remained stable despite experiencing returning monsoon. We expect realizations to improve in north, west, east while remaining stable in south and central regions on account of supply surplus. With ~60% of ACC sales coming from high growth north, west and east regions (balance from central and south regions), we factor in a 6.3%/4.5% yoy jump in realizations in CY13/CY14.

Jamul 5mtpa plant to commence operation by H1 CY15

ACC is enhancing its capacity by 5mtpa to 35mtpa (by H1 CY15) by setting-up a plant at Jamul, Chhattisgarh. The new capacity expansion, in our view, will be inadequate to bring market share back to CY08 levels. Going by current trends, most of the company's plants (except south) will be running at 95% utilization levels by CY15, thereby limiting scope of further volume push. We believe up-cycle in cement sector and strong balance sheet will prompt ACC to augment its capacity organically or inorganically in the near future.

Valuation appear appealing at 12x CY14E; Recommend BUY

ACC balance sheet continues to be strong with cash and cash equivalent at Rs.32bn (as against 27bn a year before). Return ratios, which were on a declining mode, are expected to improve in CY13 and CY14. Debt/equity continues to remain low as most of the recent expansion has been funded through internal accruals. Despite a strong balance sheet, ACC trades at a 20% discount compared to its peers like Ultratech on EV/ton basis. We believe current valuation leaves enough room for upside and recommend BUY for an 9-month target of Rs.1,520.

Source : Equity Bulls

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