Sell ACC; target of Rs 1210: FinQuest Securities

FinQuest Securities is bearish on ACC and has recommended sell rating on the stock with a target of Rs 1210 in its October 22, 2012 research report.

“Holcim group ACC posted excellent set of numbers during Q3CY12 primarily driven by improved realization and cost matrix. The dispatches growth during the quarter though was disappointing as some of the major markets of the company witnessed slowdown due to monsoon. Overall the performance during the quarter was lower than ours as well as consensus estimates. The company sold 5.4 mn tonnes of cement which was 5% lower Y-o-Y (11% lower Q-o-Q), but the realizations witnessed sharp growth Q-o-Q. The total revenue rose 10% Y-o-Y to Rs 24.74 bn. Improved realization helped the margins despite sharp rise in freight expenses. This was primarily because the raw material cost for the company fell sharply during the quarter, while power and fuel cost also witnessed sharp fall during the quarter following easing commodity prices. The EBIDTA margin improved 460 bps Y-o-Y to 18.8% in Q3CY12. Although there are expectations that the industry would witness improvement in demand, the growth in realization or even sustaining the current realization levels would be difficult. Consequently maintaining the margins would also be difficult, given that the operating cost would increase as fuel cost and freight expenses increases further. Realization improved 19% Y-o-Y to Rs 4502 per tonne, while the total operating cost per tonne rose 9% to Rs 3701 per tonne, thus reinforcing the fact that how much realization growth has helped in margin improvement. EBIDTA per tonne as a result improved 53% Y-o-Y to Rs 855. The net profit after tax for the company in Q3CY12 came in at Rs 2.49 bn, which was 48% higher Y-o-Y and 41% lower Q-o-Q.”

“The demand growth for the cement industry has remained weak during the past several quarters and that has kept the capacity utilization of various plants in the country at very low levels as the industry witnessed significant capacity addition during that period. Although the macro situation has improved during the past few weeks since the government announced slew of reform measures to pump up the economy, the pricing situation continues to remain weak while the input cost scenario is also expected to worsen, thus impacting the margins. We do not see the company; or, for that matter the industry holding on to the current price levels, neither do we see margin improvement since the costs are expected to increase further due to volatile fuel prices. Two major worries for the company at this point in time are the Competition Commission of India (CCI) penalty and the Royalty payment that the company may have to make to its parent (Holcim).”

“Although we see demand picking up going ahead, the realization growth would be muted or even negative. Added to these would be the cost pressure due to higher fuel and transportation cost which would impact the margins. Similarly we are concerned about the company's huge presence in the southern market where the demand still is very low. We estimate the revenue and EPS for CY12 to come in at Rs 107.18 bn (up 13.6%) and Rs 74.6 (up 5.8%). We believe that ACC's current stock price level is not justifying the valuation levels as it is not factoring in the cost pressure and the CCI penalty. The market is also ignoring the implementation challenges of the recent reform measures of the government, and so the trickle down impact of these on cement demand would not be as high as expected. Thus we maintain our 'Sell' rating on the stock with a revised target price of Rs 1210 (Enterprise Value (EV) tonne of USD 126 - 35% discount to the average EV per tonne of the previous five years, PE of 19.5x and EV/EBIDTA of 8.9x CY12E earnings). (We assign lower EV to ACC plant than the current EV of around USD 140 as many of these plants are located in the southern region where the demand is still low.) We cite imminent margin pressure due to high fuel prices, higher freight expenses, penalty by CCI, probable royalty payment to be made to Holcim and limited pricing power for the industry from these levels. At the current market price of Rs 1408 the stock is trading at PE of 23x and EV/EBIDTA of 10.4x CY12 earnings,” says FinQuest Securities research report.  

Public holding more than 90% in Indian cos

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

To read the full report click on the attachment

Read More