HSBC
ACC reported strong Q1 results with net sales of Rs 21bn (our estimate Rs 20.5 billion) and Ebitda of Rs 6.6 billion (ours Rs 6.5 billion). Keypositives were a sequential increase in realisations (by 5% to Rs 3,767/tonne) and expansion in margins (by 550bp to 31.2%). However we see clear signs of cost pressures building. For instance, despite realisations just 4% below their historical highs for the company (in Q2/Q3CY09), Ebitda margins remain over 600bp below the peak levels in Q2CY09 and Ebitda/tonne lower by over 16%. This is despite lower energy costs in 1Q as against the past few quarters. With cost pressures building, which are unlikely to be offset by any significant future pricing strength, we expect margins in the future to be muted.
Pan-India utilisation rates are likely to decline with new capacities coming on stream in North and Central India (c50% of ACC sale volumes). Hence, cement companies would also remain challenged to fully pass on cost increases in a surplus environment. Our estimates remain 10% below consensus even as we raise CY10/CY11e Ebitda by 8%/5% due to higher than earlier forecast realisation estimates. We value ACC at 7x FY12e EV/Ebitda, which is the midpoint of the trading range between 2000 and 2006 when the industry faced demand and supply uncertainties. We raise our target price to Rs 790 from Rs 775. Our target price implies potential downside, including dividend yield, of 11.4%. We therefore reiterate our Underweight (V) rating.
Key positives
Key positives from the results were as follows:1) Realisations per ton went up sequentially by 5% to Rs 3,767/ tonne. This clearly indicates improved pricing power especially in the South where the company has c20% exposure of its total volumes.2) Ebitda margins expanded sequentially by 550bp on the back of improved realisations, as well as lower energy costs.
However, despite these positives, we believe peak margins for ACC are behind us with cost pressures building, which are likely to offset any future pricing strength. Despite the strong numbers with realisations just 4% off their historical highs for the company (in Q2/Q3CY09), Ebitda margins remain over 600bp below its peak level in Q2CY09 and Ebitda/ton lower by over 16%. This, we believe, is a clear indicator of continuing cost pressures. Hence, even with potentially further pricing strength, we believe cost pressures will continue to dominate. Moreover, the sequential decline in per ton power and fuel cost has also helped Ebitda margin improvement in Q1CY10. With global coal prices heading up again (up 13% in the past three months), we expect power and fuel costs to increase going forward. Utilisation rates in North and Central India also likely to decline with new capacities coming on stream, and we believe cement companies will remain challenged to fully pass on cost increases.
Change in forecast
We have changed our net sales forecast for CY10e and CY11e by 4% and 7%, respectively, due to higher volume and realisation assumptions than our earlier estimates. We have raised our CY10e and CY11e Ebitda estimates by 8% and 5%, respectively, due to higher volume and realisation estimates. While the demand scenario has stabilised with healthy output growth, we believe that additional supply will limit the ability of India?s cement companies to raise prices. We value ACC at 7x FY12e EV/Ebitda, which is the midpoint of the trading range between 2000 and 2006 when the industry faced demand and supply uncertainties.