ACC (Q1 CY12)

CMP Rs1,248, Target Rs1,170, Downside 6.2% 

• Revenue rise of 19% yoy lower than our estimate as realization stood flat qoq against estimated 4% growth
• OPM contracts by 160bps as power costs jump on back of higher international coal prices (due to rupee depreciation)
• One time depreciation adjustment resulted into a 55% yoy slide in PAT
• Trades at 14.6x CY13E; upgrade to Market Performer

Topline growth of 19.2% yoy below estimate

ACC revenues grew 19% yoy to Rs28.8bn, lower than our estimate of Rs29.7bn. Realization improved less than expected at 9.3% yoy but flat sequentially against our estimate growth of 4%.

Volumes grew 9% yoy basis on back of pick up in demand in the rural housing, semi-urban housing and infrastructure segment in northern, eastern and western region.

OPM contracts 160bps driven by surge in power cost 

EBITDA margins contracted by 160bps yoy to 22.3% lower than our estimate of 22.7%. Lower-than expected performance was mainly on account of higher power and fuel cost (Rs1,006/ton against an expectation of Rs970/ton) as rupee depreciation translated into a higher landed international coal prices.

We expect OPM to remain under pressures on back of escalating input cost. In addition, any hike in diesel price will result into higher fuel and freight cost for ACC.

Deprecation adjustment drags PAT

Reported PAT was lower by 55% yoy to Rs1.6bn due to change in depreciation policy for fixed asset pertaining to its captive power plant. Further, new capacity expansion (at Wadi) led to 16% jump in depreciation for the quarter. Interest outgo increased by 25% yoy due to higher borrowing.

Upgrade to Market Performer

We expect ACC volumes to grow by 9% and 7% in CY12 and CY13 respectively, on the back of stability in new plants and volume growth kicking in from acquisitions made in CY09. We factor in margin improvement over the next two years given the easing pressure on realizations.

Since our last SELL reco, stock has declined 10% and we now believe downside is limited largely on the back of valuation support; In addition, a strong balance sheet and improving industry dynamics support our upgrade to Market Performer with a price target of Rs1,170, valuing ACC at 13x CY13 EPS of Rs90.