ACC declared its CY08 results, which were about 11% below our estimates on the operating level due mainly to lower volumes and higher costs.
Net sales of Rs20 billion were up by 14% y-o-y. EBITDA of Rs3.7 billion was down by 12% y-o-y and net profit of Rs2.2 billion was down by more than 50% y-o-y.
We are reducing our CY09 and CY10 estimates to account for lower volume expectations because we foresee some delays to expansion plans. However, we foresee improved operating profitability due to reduced freight costs.
We believe that ACC has already exhausted the easy ways to reduce costs because most of its production is based on domestic subsidised coal, it already has coal-based captive power plants and it is reaching saturation in blending. The only major avenue in our opinion is a merger with its sister concern, Ambuja Cements.
Majority of 7mtpa of further expansion may not be completed until CY10. In our view, ACC will, at best, grow in line with the industry.
We are reducing our EPS estimates for CY09 and CY10 by 13% and 9%, respectively. In the absence of cost reduction levers, the stock lacks any positive catalyst except for cement prices.
We thus are lowering our rating from Neutral to UNDERPERFORM. We believe that the current rally in the stock along with an improved business outlook is a good opportunity to book profits. We recommend a switch to emerging industry leader Grasim Industries (Target Price: Rs1802).
We are marginally reducing our target price on ACC from Rs463 to Rs452 based on DCF.