ACC Limited’s EBITDA margin nosedived 409 bps in Q1’08 due to a surge in raw material and fuel costs. However, net sales increased 9% y-o-y on the back of a higher sales volume.
Since the company’s major expansion plans are scheduled to be completed in 2009, we believe that it will face a capacity constraint in 2008.
ACC is working at a 90% utilisation rate, and blended cement constitutes approximately 90% of the total cement manufactured. This leaves little scope for an increase in cement production without capacity expansion. Thus, we believe that top line will grow by around 3% in CY08E, however for CY09E it is expected to be 8%.
Going forward, factors such as government price control policies and a likely excess supply scenario will further keep realisations under pressure. EBITDA margin, which already witnessed a drop in the recently concluded quarter, will reduce further.
The stock is currently trading at a P/E of 9.6x CY08E. We have valued the company using DCF analysis. Based on our analysis and valuation, the stock seems to be fairly valued. We reiterate our HOLD rating.