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Earnings in-line, maintain SELL on expensive valuations Fortune

India Equity Research Q4CY11 Result Update

SELL
Sector outlook: Positive

Cement
ACCs Q4CY11 earnings were in-line with our estimates. (EBITDA/t of Rs657 vs 676/t estimated, +77% YoY). However, not much can be read into the quarterly results as these are derived numbers. For CY11, the company reported an EBITDA/t of Rs716, which is lower than CY10. This despite a realization gain of 11.0% and volume increase of 11.5%, as inputs costs led by power and fuel costs surged. Adjusted PAT grew 5.7%. Subsequent to a Supreme Court judgment on extension of tax benefits on expansion in a backward area, in case of a separate company, ACC took a tax credit of Rs2,279mn resulting in a reported PAT of Rs13,253mn (+18%). Volume growth estimates We remain sanguine about the CY12 volume growth estimates for the company. The company will not add any capacity in the next two years and is likely to sit on cash. Nearly 10mn tpa (~30%) of its cement capacity is in South (Wadi and Madukkarai) and utilizations are not likely to cross 70% for the next 2-3 years. Thus, utilizations cannot be higher than ~88%, assuming 95% utilization for the rest of India capacity. Hence, maximum possible CAGR for ACC is ~6%, even though the demand may grow faster for the country. Valuation and view We have increased our CY12/CY13 estimates to factor in higher realization and input prices. (Please refer Exhibit 01). We continue to value the companys capacities in South at a 20% discount to replacement cost, resulting in a weighted average discount of 6.6%. We recommend a SELL with a price target of 1,016, from the earlier 987/share. Our price target implies 8.5x CY12 EV/EBITDA and 16.1x P/E. Quarterly financials (Standalone)
Y/E Dec (Rs mn) Q4CY11 25,027 5,836 23.3 3,764 15.0 11,533 46.1 3,894 15.6 1,270 192 2,956 458 3,414 -1,291 (37.8) 4,705 2,280 2,425 9.7 Q4CY10 19,576 4,513 23.1 2,995 15.3 9,983 51.0 2,086 10.7 1,119 137 2,142 242 2,383 0 (173) (7.2) 2,556 820 1,736 8.9 Q3CY11 21,499 5,524 25.7 3,329 15.5 10,443 48.6 2,204 10.3 1,199 253 1,738 574 2,312 637 27.5 1,675 1,675 7.8 39.7 44.8 2,388 9.7 1.6 (4.4) 84.0 180.8 43.2 47.7 86.7 490 76.7 531 YoY (%) 27.8 QoQ (%) Q4CY11E 16.4 24,530 5,691 23.2 3,234 13.2 11,673 47.6 3,932 16.0 1,211 253 2,837 574 3,411 0 1,023 30.0 2,388 97.0 0.1 (1.0) (47.1) Variance (%) 2.0

ACC Limited

February 09, 2012

Target price: Rs1,016


CMP: Rs1,389 * Downside: 26.9%
* Price as on February 09, 2012 500410 ACC ACC.BO ACC.IN Market cap (Rs mn) Daily vol. (3M avg.) Current share O/S (mn) Diluted shares (mn) Promoters holding (%) Pledged shares (%) Sensex: 17,830 Nifty: 5,413 52W-H/L:1,398/917 Face Value-Rs10 260,752 385,000 188 188 50.3 -

Ankur Kulshrestha Ankur.kulshrestha@fortune.co.in +91 22 4300 3864

Key financials (Y/E December) (Rs mn) Net sales Growth (%) EBITDA EBITDA (%) PAT Growth (%) Diluted EPS

CY11
94,387 22.3 16,991 18.0 10,973 5.7 70.4

CY12E CY13E
109,905 16.4 19,557 17.8 11,877 8.2 63.2 120,967 10.1 21,004 17.4 12,928 8.8 68.8

Net sales Power & fuel expenses % of sales Freight costs % of sales Other expenditure % of sales Operating profit OPM (%) Dep. and amortization Interest

Source: Company, Fortune Research

Valuation/Ratios (x) P/E P/B EV/EBITDA EV/Sales RoE (%) RoCE (%)

CY11
19.7 3.6 14.0 2.5 16.1 19.2

CY12E CY13E
22.0 3.4 12.1 2.2 15.9 15.5 20.2 3.1 11.3 2.0 16.0 15.7

EBT Other income PBT Excep. item (as reported) Provision for tax -effective tax rate PAT (Reported) Excep. item (Post tax) PAT (Adjusted) NPM (%)

Source: Company, Fortune Research

Source: Company, Fortune Research Note: Tax credit pertaining to earlier years of 2,280mn in Q4CY11 (Rs820 in Q4CY10)

See Disclaimer at the end of the report.

1 Fortune Group

Bloomberg Code FEBL <GO>

Exhibit 01: Changes to estimates


Rs mn New estimates CY11E Net sales EBITDA Adj. PAT 109,905 19,557 11,877 CY12E 120,967 21,004 12,928 Old estimates CY11E 102,029 19,406 12,213 CY12E 111,413 20,475 12,984

Fortune Group

% Change CY11E 7.7 0.8 (2.7) CY12E 8.6 2.6 (0.4)

Exhibit 02: Key assumptions


Cement & clinker volumes (mn t) Realizations (Rs/t) P&F cost/t (Rs/t) Raw material costs/t (Rs/t) Freight cost/t (Rs/t) EBITDA/t
Source: Company, Fortune Research

CY09 21.7 3,680 714 461 486 1,142

CY10 21.3 3,585 744 581 500 730

CY11E 23.7 3,978 964 710 619 716

CY12E 25.2 4,376 1,008 760 686 777

CY13E 25.9 4,683 1,092 845 727 812

Exhibit 03: Quarterly sales volumes


(mn tonnes) 7.0 6.2 6.0 5.4 5.0 4.0 3.0 6.0 5.9 (%) 20.0 15.0 10.0 5.0 (5.0)

Volumes growth subsided as base effect kicked in (Wadi became operational in Q4CY11)

5.6

5.6 5.3 4.8

5.7

4QCY09

1QCY10

2QCY10

3QCY10

4QCY10

1QCY11

2QCY11

3QCY11

Domestic sales volume

YoY(%)

Source: Company

Exhibit 04: EBITDA & realization trend


(Rs / tonne) 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 804 1,115 1,049 900 925 Rs / tonne 1,400 1,200 1,000

3,834

3,585

3,767

3,490

3,778

prices in Central and West India

3,390

significantly YoY due to strong

3,893

4,039

4,220

Realizations improve

4QCY11

800 600 400 200 -

657

352

372

387

4QCY09

1QCY10

2QCY10

3QCY10

4QCY10

1QCY11

2QCY11

3QCY11

Realisation per tonne

EBITDA per tonne

4QCY11

Source: Company

ACC

Exhibit 05: Key costs trend


(Rs / tonne) 2,500 2,000

Fortune Group

641 490 498 447 493 526 512 539 467 591 599 585 534 559

616

581

Input costs increase driven by power & fuel and freight costs (YoY)

1,500 1,000 500 -

585

635

752

707

731

781

799

777

956

963

984

4QCY09

1QCY10

2QCY10

3QCY10

4QCY10

1QCY11

2QCY11

3QCY11

P&F costs/tonne

Freight cost/tonne

RM Cost/tonne

Source: Company

ACC

4QCY11

Standalone financial statements (Y/E December)


Income statement
Net sales % growth Power & Fuel % of net sales Freight % of net sales Other expenses % of net sales EBITDA EBITDA margin (%) Depn & amortn. EBIT Interest exps. EBT Other income Extraord. (Inc.)/Exps. PBT Tax-Total Tax rate (%) Total MI Associates Reported PAT PAT margin(%) Growth Extraordinaries Adjusted PAT % growth

Fortune Group (Rs mn)

CY09
80,272 12.0 15,397 19.2 10,544 13.1 29,528 36.8 24,803 30.9 3,421 21,383 843 20,540 2,404 0 22,944 6,877 30.0 0 0 16,067 20.0 32.5% 0 16,067 32.5

CY10
77,173 (3.9) 15,987 20.7 10,703 13.9 34,943 45.3 15,540 20.1 3,927 11,613 568 11,046 3,570 0 14,615 3,414 23.4 0 0 11,201 14.5 (30.3%) 820 10,381 (35.4)

CY11
22.3 21,832 23.1 14,017 14.9 41,547 44.0 16,991 18.0 4,753 12,238 969 11,269 4,135 0 15,404 2,152 14.0 0 0 13,253 14.0 18.3% 2,280 10,973 5.7

CY12E
16.4 25,347 23.1 17,256 15.7 47,744 43.4 19,557 17.8 5,208 14,349 761 13,587 3,381 0 16,968 5,090 30.0 0 0 11,877 10.8 (10.4%) 0 11,877 8.2

CY13E
10.1 28,256 23.4 18,812 15.6 52,894 43.7 21,004 17.4 5,369 15,635 605 15,030 3,439 0 18,469 5,541 30.0 0 0 12,928 10.7 8.8% 0 12,928 8.8

Balance sheet

CY09
1,879 58,283 60,162 0 5,500 169 5,669 3,493 69,324 68,263 26,680 21,562 63,145 14,756 7,790 2,037 50 7,464 5,604 22,945 20,603 10,919 31,522 (8,578) 0 69,324

CY10
1,880 62,815 64,695 0 5,099 139 5,238 3,615 73,548 80,770 29,945 15,628 66,452 17,027 9,150 1,783 561 10,800 5,239 27,533 20,940 16,525 37,464 (9,931) 0 73,548

CY11E
1,879 70,043 71,923 0 5,000 107 5,107 5,184 82,214 96,773 34,698 4,353 66,429 16,250 10,997 2,604 150 16,526 5,903 36,179 26,104 10,540 36,644 (465) 0 82,213

CY12E
1,879 75,763 77,643 0 5,000 46 5,046 5,184 87,872 97,773 39,906 6,353 64,220 16,250 12,235 2,472 0 23,436 5,903 44,046 26,104 10,540 36,644 7,402 0 87,872

CY13E
1,879 82,535 84,415 0 3,000 15 3,015 5,184 92,614 102,773 45,275 4,353 61,851 16,250 11,816 2,787 0 31,366 5,903 51,872 26,104 11,255 37,359 14,513 0 92,614

94,387 109,905 120,967

Sources of funds
Equity capital Reserves and surplus Shareholders funds Minority interest Secured loans Unsecured loans Total loan funds Deferred tax liab. Net Total liabilities Appl. of funds Gross block Accumulated depn. Capital WIP Net fixed assets Other investments Inventories Sundry debtors Other current assets Cash and Cash equivalents Loans and advances Total current assets Current liabilities Provisions Total current liab. Net current assets Misc. expenditure Total assets

Source: Company, Fortune Research Estimates

Source: Company, Fortune Research Estimates

Ratios O/s shares (mn) Fully diluted shares (mn)


Per share (Rs)

CY09
188 188 85.6 85.4 103.7 320.1 16.3 4.3 3.0 9.6 29.4 27.8 0.1 N/M

CY10
188 188 59.7 59.5 80.5 344.2 23.3 4.0 3.1 15.3 16.6 17.1 0.1 N/M

CY11E
188 188 70.6 70.4 95.8 382.7 19.7 3.6 2.5 14.0 16.1 19.2 0.1 N/M

CY12E
188 188 63.2 63.2 90.9 413.1 22.0 3.4 2.2 12.1 15.9 15.5 0.1 N/M

CY13E
188 188 68.8 68.8 97.4 449.2 20.2 3.1 2.0 11.3 16.0 15.7 0.0 N/M

Cash flow Net profit Depreciation Change in working capital Change in deferred tax liability Provisions and other adjustments Net Cash from operating activities Capital expenditure Sale of assets

CY09
16,067 3,421 6,138 135 25,761 (15,840)

CY10
11,201 3,927 4,690 123 19,940 (7,234)

CY11E
13,253 4,753 (3,741) 1,568 15,833 (4,729)

CY12E
11,877 5,208 (957) 16,129 (3,000)

CY13E
12,928 5,369 820 19,117 (3,000)

EPS FDEPS Cash EPS Book value

Valuation (x)
P/E Price/Book value EV/Sales EV/EBITDA

Sale / (Purchase) of Investments (7,966) (2,270) Net Cash used in Investing Activities (23,806) (9,505) Dividend and Dividend Tax Increase/ (decrease) in debt Others Net cash used in financing activities (5,051) 849 (131) (6,677) (431) 9

777

(3,952) (3,000) (3,000) (6,157) (131) 132 (6,157) (62) (0) (6,157) (2,031) 1 (8,187) 7,930 23,436 31,366

Profit ratios (%)


RoE RoCE Leverage ratio Debt/Equity (x) Net Debt/Equity (x)

(4,333) (7,099) 3,337 7,464 10,800

(6,156) (6,219) 5,725 10,800 16,526 6,910 16,526 23,436

Increase (decrease) in cash (2,379) Cash at the beginning of the year 9,842 Cash at the end of the year 7,464
Source: Company, Fortune Research Estimates

Source: Company, Fortune Research Estimates

ACC

Fortune Group

Investment ratings (Returns) Buy (>10%)


Hold (-10 to 10%)

Sell (<-10%)

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ACC