ACC - In line volume; disappoints at EBITDA level - Ambit

ACC results came in below expectations despite volumes and realisations in line with expectations; post adjusting for RMC business, we find that unitary EBITDA declined because of significantly higher other expenses and employee costs. These unexpected high other expenses were visible in Ambuja too. ACC's cement business EBITDA and PAT were ~18% and ~23% lower than expectations as unitary EBITDA declined 25% QoQ. We expect unitary profits to recover in 1QCY13 but not to regain all lost ground due continuing hikes in freight cost, limited increase in realisations due to weak demand and high capacity additions. We expect downgrades to our sub-consensus estimates for CY13 and valuations. Maintain SELL. Stock trades at 9.3X CY13 EBITDA.

Poor operating performance: Grey cement volumes of 5.88mn tonnes (flat YoY, up 8% QoQ, in line with estimates) and realisation of Rs4,500/tonne (ex-operating income) were in line with our estimates. However, the big negative surprise was Grey cement EBITDA/tonne, which was much lower than expected at ~Rs644 per tonne (18% lower than our estimated Rs786/tonne). Whilst the unitary costs are not comparable because of entire RMC business of subsidiary getting added in Q4, we believe that company did have lower-than-expected power & fuel costs but had significantly high other expenses, employee and raw material costs. Adjusting for the loss making RMC business we find that the adjusted EBITDA of the cement business declined by 14% YoY and was 18% lower than expectations. Similarly, adjusting for the RMC business' losses and tax shields, we believe that cement business' adjusted PBT and PAT were lower by ~23% from our estimates.

Our view on the annual result: As expected, ACC's volumes have grown far lower than the industry, 2% in CY12 vis-à-vis the industry growing by 6.5-7% and peers like Ambuja growing at 2.5nd UltraTech growing at 3.9% e annual capacity utilisation was 80.3%, much ahead of the industry average of 75%. For the overall year, the company posted an EBITDA/tonne of Rs902/tonne (up 10.5% from CY11); hence total EBITDA of Rs21.7bn vs Rs19.2bn in CY11. Furthermore the adjusted cement business PAT for CY12 was Rs12.7mn (reported Rs10.6mn); we make adjustments for depreciation and RMC business. The company has generated operating cash flow (pre tax) of Rs15.8 bn in CY12 vs Rs19.9ncrease from these low levels (Rs4.5bn in CY11).

Where do we go from here? Given the absorption of RMC business, we will have to re-model the company for RMC revenues and its poor profitability (continuously loss making for a number of years). However, the real downward revision will come from the impact of rising diesel prices to freight costs amid pricing pressure given marginal recovery in demand and significant capacity additions. We are presently estimating total EBITDA to grow by 8% in CY13 (and EBITDA/tonne of Rs950) and now expect that EBITDA could be at best flat or may decline marginally. Given this reduced EBITDA estimates and incorporating RMC business losses, the overall PAT may fail to grow and high likelihood that it may decline because of higher taxes; we presently estimate 8% growth in cement business PAT. Most importantly, the decline will be much higher on the Free Cash Flow as the company invests for adding new 5mn (17% of present capacity) tonnes capacity in a phased manner by CY15-end. We expect ACC volumes to grow (6.4% in CY13) behind industry volume growth of 8-9% as we expect the new capacities of small/mid-size regional players to garner higher share of institutional demand. We expect realisation for ACC to grow by 7% (Rs300/tonne).

Valuation and Recommendation

Currently, ACC is trading at 9.3x one-year forward EV/EBITDA. On an EV/tonne basis, the stock is trading at US$153, at a 13% premium to the replacement costs (US$135-140) and 23% to the three-year average. We maintain our SELL stance on the stock, since we believe ACC will continue to lag the industry volume growth. Furthermore, the rising industry fragmentation and scale of the regional players, will limit improvement in realisations and unitary EBITDA. Our one-year forward fair valuation is Rs1,448, implying a 10.2x CY13 EV/EBITDA or a US$153/tonne. We expect 5-10% downgrades to our published CY13 estimates and hence valuations.

Source : Equity Bulls

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