ACC rating ‘Buy’: Negative operating leverage a dampener

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Updated: October 27, 2018 2:30:16 AM

Realisations hit by weak monsoon pricing; Ebitda/t is likely to rise in seasonally strong Q4CY18; ‘Buy’ retained

ACC rating, EBITDA, RMC plants, Non-trade cement prices ACC reported strong cement volumes of 6.6 mnt, up 10% y-o-y but down 10% q-o-q, despite seasonality effect (monsoon). (Reuters)

Q3CY18 EBITDA at Rs 4.5 bn (up 7% y-o-y) was lower than consensus and our estimates primarily due to negative operating leverage; however, we expect Ebitda/t to rise in a seasonally strong Q4. Cost/t was higher by Rs 150 q-o-q mainly due to increase in fixed cost components of staff cost and other expenses. On variable cost, only power and fuel cost moved up on rising coal and petcoke prices coupled by weak rupee; other variable costs were steady q-o-q.

Volumes: ACC reported strong cement volumes of 6.6 mnt, up 10% y-o-y but down 10% q-o-q, despite seasonality effect (monsoon). East continues to be the key growth driver. RMC segment volume also grew a strong 12% y-o-y mainly on addition of 8 new RMC plants. Capacity utilisation was 80% in Q3CY18 vs. 73% in Q3CY17.

Average realisation: Average realisation was down Rs 100/t q-o-q to Rs 4,780/t on weak cement pricing in monsoon. Ebitda per ton was at Rs 680 in Q3CY18 vs. Rs 920 in Q2CY18 and Rs 700 in Q3CY17. We believe Ebitda/t will rise from next quarter, as Q4 is historically a strong quarter. Company is also taking various initiatives to reduce the fixed cost.

Cement sector outlook: Cost pressure continues to hurt margin, as cement companies struggle to pass on cost rise in an increasingly competitive environment. However, demand is recovering, especially in affordable and rural housing segments, which will eventually strengthen cement pricing. Non-trade cement prices have recovered during the quarter and the gap between trade and non-trade narrowed to normal levels of 8-10%.

Valuation: Our CY18/19/20 EPS estimate is Rs 59/69/78. We have Buy rating with target price of Rs 1,765 (12x CY20e EV/Ebitda), which implies 15% upside from CMP of Rs 1,540.

 

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