Sell ACC; target of Rs 1150: FinQuest Securities

FinQuest Securities is bearish on ACC and has recommended sell rating on the stock with a target of Rs 1150 in its April 23, 2012 research report.

“Poor sequential growth in realization resulted in ACC's revenue coming in marginally lower than our estimate for Q1CY12. The total revenue came in at Rs 28.89 bn (+19.2% Y-o-Y, +13.1% Q-o-Q) as compared to our estimate of Rs 30.33 bn. The cement dispatches for Q1CY12 rose 8% Y-o-Y (15% Q-o-Q) to 6.7 mn tonnes. While the volumes increase was primarily due to additional capacity stabilization, the lack of growth in prices at a time when there is significant inflationary pressure on cost is a major worry. January to June period is usually the peak season for the cement industry when the prices witnesses firm growth. But the lack of it in Q1CY12 amplifies the fact that the prices have reached the peak. The realization per tonne only rose marginally to Rs 4256 per tonne. The increase in price of coal by Coal India (CIL) after their recent wage hike and higher freight expenses caused by rising fuel prices and railway wagon cost had its impact on the margins during the quarter under review.”

“The EBIDTA margin came in at 22.3% in Q1CY12 (159 bps lower Y-o-Y, 503 bps higher Q-o-Q). The cost per tonne in Q1CY12 rose 12.8% Y-o-Y to Rs 3340 although it was lower by 7.4% Q-o-Q as a result the EBIDTA per tonne only rose by 3.2% Y-o-Y to Rs 960.”  The overall cement demand growth in India continues to be at creepy phase, while the cost inflation is only expected to worsen given that CIL is under severe pressure to raise prices going ahead. Further increase in fuel (petrol and diesel) costs is expected to hike the freight expenses of the cement companies sharply. The cement prices across the country are currently quoting at all time high levels. Thus the flexibility to pass on the cost increase from here on appears limited and could pressurize the margins going ahead. At some point we believe that there would be government intervention to control prices. The regulatory uncertainty with regard to the investigation by Competition Commission of India (CCI) on cartelization charges by cement major is another major overhang.”

“The net profit after tax for the company in Q1CY12 came in at Rs 1.55 bn, which was 55.7% lower Y-o-Y and 67% Q-o-Q. This was primarily due to a one time additional depreciation charges of Rs 3.35 bn caused due to change in method of providing depreciation on captive power plants from straight line method (SLM) to written down value (WDV) method with retrospective effect. The adjusted net profit as a result came in at Rs 3.99 bn (+14% Y-o-Y, 15.1% Q-o-Q). Adjusted EPS for the quarter came in at Rs 21.3.”

“We continue to believe that the cement demand growth will improve going ahead and that would improve the demand supply dynamics. The company's pan India presence will help in ramping up volume growth especially from the south and the western region as demand here improves. Nevertheless the room to increase price on the back of healthy demand would be absent, thus we are concerned about the pricing growth and margins going forward. We believe that at some point there would be government intervention in some form or the other to control or even reduce price while the investigation pertaining to cartelization by CCI present incremental uncertainty. Considering the pricing and margin pressure going ahead we are lowering our net sales and EPS estimates for CY12 from Rs 110.95 bn and Rs 87.6 to Rs 110.5 bn and Rs 84 respectively.”

“We had initiated coverage on the stock on 23rd November 2011, with a one year price target of Rs 1278. The target was achieved on 6th February 2012 after that we had lowered our rating to hold with a new price target of Rs 1420, which too was achieved on 10th February 2012. While we continue to be positive on the cement industry macro, we believe that the current price of ACC is not factoring in the risk related to further increase in coal price by CIL and potential penalty arising out of the investigation by CCI. Besides going ahead as we enter the monsoon season we would witness some fall in realization especially in the western and the southern region. We revise our rating from 'Hold' to 'Sell' with a new target price of Rs 1150 (EV per tonne of USD 118 - 35% discount to the average EV per tonne of the previous five years, PE of 13.7x and EV/EBIDTA of 8x CY12E earnings). We cite imminent margin pressure due to coal price increase by CIL, higher freight expenses due to rising fuel prices, probable penalty from CCI investigation and limited pricing power for the industry from these levels. At the current market price of Rs 1226 the stock is trading at PE of 14.6x and EV/EBIDTA of 8.4x CY12 earnings,” says FinQuest Securities research report.

Public holding more than 90% in Indian cos

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