For the quarter ended September 2008, ACC Limited’s net sales grew 7.5% y-o-y. However, the EBITDA margin declined 106 bps, while adjusted net profit remained flat on a y-o-y basis.
We believe that the company’s volume and price growth will take a substantial hit in the coming quarters because of the slowdown in the real estate sector (due to the global economic turmoil), which accounts for nearly 55% of the demand for cement.
Moreover, as the effect of the global liquidity crunch deepens, the infrastructure and industrial demand for cement will also be reduced significantly.
Furthermore, a significant increase in the ACC’s capacity is expected only by mid-2009, when realization rates are expected to moderate from the present levels because of excess supply.
We expect EBITDA margin to fall by 583bps y-o-y to 21.5% in CY09. The double whammy of slowing demand and significant capacity addition in the next couple of years will put downward pressure on the realization rates and the capacity utilization rates.
As a result, the fixed cost burden per tonne is expected to increase. Meanwhile, although the price of imported coal, which currently meets 15% of ACC’s coal requirements, has fallen sharply to $140-150 per tonne from a high of $200 per tonne, rupee depreciation is likely to negate a substantial portion of this benefit.
A majority of ACC’s volumes are accounted for in the northern, central, and eastern markets, which are likely to experience lower demand growth than the southern and western regions.
The stock is trading at a forward P/E of 7.5x for CY08E, higher than the average peer group P/E of 5.36x. The current market price provides a 12% premium to the replacement cost of Rs454 and a 14% downside to our DCF-based fair value estimate of Rs436.