ACC (Q4 CY10)

CMP Rs986, Target price Rs818, Downside 17.0%

• Revival in volumes drives revenue

• OPM tumbles 855bps on the back of surge in RM, power and staff costs

• Tax adjustments arrest fall at PAT levels

• Margin pressure to dampen earnings; Retain SELL

ACC Q3 CY10 topline grew 5% yoy to Rs21bn, above our estimates of Rs20.1bn. This outperformance was largely due to revival in volumes, which rose 7% yoy in Q4 as against a decline of 3% registered during 9M CY10, as new plants stabilized. We project the company will witness 9% volume growth in CY11, which is higher than expected industry rate of 7%.

To our surprise, average realization for ACC was down 5% but was up 3% qoq (against our expectation of 5-8% increase) as cement prices went northwards pan-India post Q3 CY10. We expect realization to improve in Q1 CY11 as most of the companies have announced fresh round of price hikes during January 2011. Other operating income grew 110% yoy to further improve the company’s top-line. 

Increase in RM, staff and power costs lead to OPM contraction

OPM tumbled 855bps yoy to 16.3%, below our estimate of 22%. Lower than expected operating performance was on account of:

A) Hike in slag and fly-ash prices translated into higher RM cost, B) Staff cost increased by 62% on the back of commencement of new units coupled with increase in wages (Rs265/ton against Rs175/ton a year ago), and C) Increase in power cost owing to jump in international coal prices.

Tax adjustments arrest fall at PAT levels

Reported PAT for ACC declined by 8% yoy basis to Rs2.6bn. This was despite a 38% drop at PBT levels as prior period tax adjustments led to a tax inflow during the quarter. Recent capacity addition resulted into depreciation cost being higher by ~6%.

Pressure on operating margins to continue; Maintain SELL

ACC volumes have fallen ~0.5% yoy in CY10, due to slowdown in cement consumption, delay in stabilization of new capacities and shortage of railway wagons. However, we project ACC to witness 9% volume growth in CY11, which is higher than expected industry rate of 7% on the back of stability in new plants and volume growth kicking in from acquisitions made in CY09.  OPM would continue to remain under pressure over the next two quarters given the pressure on realization and mounting cost overheads. We maintain SELL and downgrade our target price to Rs818, valuing ACC at 11X CY12 EPS of Rs74.