ACC - Stock sees significant correction; upgrade to Add - BRICS

change ACC's results were below our expectations, with PAT coming in at Rs2.99bn, vs. our estimate of Rs3.41bn, due to lower than expected volume. Revenue growth was muted at 2% yoy, due to merger of RMC subsidiary in Q4. However, flat realisation, cost escalation and merger of low margin RMC business pulled margins down by 572bps yoy to 15.3%. Over the last six months, the stock has seen a significant correction, given weak sector fundamentals and continued oversupply. Currently, the stock trades at EV/tonne of US$ 124, which is slightly lower than replacement cost. Upgrade to Add.

Revenue growth driven by merger of RMC subsidiary: ACC's cement volume was down 4.5% yoy, due to sluggish demand, while realisation was up just 1% yoy. Consequently, cement revenue declined 3.6% yoy. However, inclusion of RMC's revenue consequent to merger with subsidiary, ACC Concrete (ACCCL), helped revenue increase by 2.4% yoy.

Margins contract yoy: ACC's freight cost/tonne also rose 13% yoy, driven by rail freight hikes and monthly increases in diesel costs. However, significant softening in international coal prices resulted in power and fuel cost/tonne remaining largely flat yoy (up 0.5% yoy). In spite of this, a marginal growth in realisation, cost escalation and lower margin RM Cbusiness pulled operating margin down by 572bps yoy to 15.3%.

EBITDA/tonne stood at Rs696 vs. Rs891 in Q1CY12. After adjusting for tax credit of Rs1.41bn related to earlier period, PAT fell 23% yoy to Rs2.99bn, vs. our expectation of Rs3.41bn.

Capex: ACC's Jamul expansion is progressing as per schedule and is likely to be commissioned in phases in CY15.

Revising estimates: We have lowered our EPS estimates for CY13 and CY14 by 17% each, after factoring in the downward revision to our estimated growth in realisation for CY13, given the poor sector fundamentals and outlook.

Valuations: Given weak cement demand, impending oversupply scenario and volatile prices, the stock has witnessed a significant correction over the last six months. At its current price, the stock trades at EV/tonne of US$124 CY13, which is marginally lower than replacement cost. We believe cement companies should trade at replacement cost during cyclical downturns and hence, upgrade ACC to Add from Reduce.

Source : Equity Bulls

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