ACC operating performance below estimate, stay ?neutral?

Motilal Oswal

We maintain ?neutral? on ACC with a target price of R1,601 (~9x CY14e EV/Ebitda). The stock currently trades at 7.2x CY14e EV/Ebitda. We downgrade CY13e and CY14e EPS by 9% and 5%, to R72.5 and R93.5, respectively, to factor in lower volumes (8% growth versus 10% earlier) and realisation (~R9 and R12 per bag CY13e and CY14e), higher royalty (up 0.7%) and merger of ready mix concrete (RMC) subsidiary. Our estimates factors in for 6% and 7.5% energy cost inflation and 7.5% and 5% freight cost inflation in CY13 and CY14.

ACC?s pan-India presence and a very strong brand equity makes it one of the best proxies on the Indian Cement industry. However, given its highest dependence on domestic linkage coal (over 60%), ACC would be worst impacted due to a reduction in availability of linkage coal.

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Allotment of coal blocks in MP and West Bengal offers option value. ACC?s operating performance is below estimate, with Ebitda of ~R317 crore (versus estimated R333 crore), impacted by lower-than-estimated realisations.

However, higher other income and lower tax boosted reported net profit to R239 crore (versus estimates of R188 crore), a 15% y-o-y decline. Results are not comparable as merger for RMC business subsidiary is fully done in Q4CY12 (for CY12).

Volumes were flat y-o-y (up 10% q-o-q) to 5.94 million tonne (MT) against an estimated 6 MT. Grey cement realisations declined 7.5% q-o-q (down 0.8% y-o-y) to R4,166 per tonne (against R4,327 per tonne), as ACC was aggressive on pricing to achieve year-end targets. Net sales (ex-RMC) declined 1% y-o-y (down 2% q-o-q) to R2,470 crore (versus forecasts of R2,610 crore). RMC business revenues in Q4CY12 fell 18% y-o-y (down 1.5% q-o-q), reflecting weak activity in organised housing and infrastructure projects.

Costs were lower than estimates, driven by savings on the energy side (due to a higher contribution of linkage coal). Total cost (ex-RMC) fell ~2.3% q-o-q (up 2.4% y-o-y).

The company has indicated that royalty of 1% to Holcim would be in lieu of technical services fees (excluding IT services fees) paid to Holcim currently. Effectively, net increase in royalty would be 0.6-0.7%. The board recommended total dividend of R30 per share (including interim dividend of R11 per share versus CY11 R28 per share).