We recently met the management of ACC to know how the company views the demand-supply scenario in the cement industry for CY2009/10 and to find out the status of the ongoing expansion plan of the company.
The unexpected volume growth delivered by the domestic cement industry in the past four months (November- February 2009) has created positive sentiment for the cement industry.
As per the management, the volumes have grown in the last four months on account of a pick-up in the governmental projects and the personal house building activity in the semi urban and rural areas.
The momentum is likely to continue till June 2009 as the existing government has to spend the money allocated for the infrastructure sector by this fiscal. The rural area is also expected to support the volume growth till the monsoon begins.
After June 2009 the growth (volume) is likely to lose momentum on account of monsoon arrival and the expected slowdown in the governmental infrastructure projects.
As per the management, the company is expected to record a better than expected volume growth in CY2009 and CY2010. The volume guidelines for CY2009 and CY2010 are 22.27 million tonne (MMT) and 23.61MMT respectively, indicating a growth of 6% each on a year-on-year (y-o-y) basis.
However, the projected volume may alter with the change in the gross domestic product growth.
Outlook and valuation
The company has guided for a 6% volume growth during CY2009 and expects to maintain its operating profit margin at 23%.
We expect the company to benefit going forward due to its strong balance sheet as a major portion of its planned capital expenditure (Rs3,650 by CY2010) is expected to be funded through internal accruals.
As per Bloomberg consensus estimate, the company is expected to record earnings per share (EPS) of Rs53.3 and Rs43.1 in CY2009 and CY2010 respectively on a stand-alone basis.
At the current market price of Rs531 the stock trades at price/earnings of 10x discounting its CY2009 earnings, an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 6.6x for FY2009 and an EV/tonne of $75 on FY2009 capacity (27.4MMT).