ACC Ltd. Result Update
Per ton cement realization has gone up for ACC both on yoy basis and on sequential basis for Q4CY06. On yoy basis the realization has gone up by 44.9% to Rs3156. On sequential basis the growth is 3.4%. We expect cement prices to remain firm in CY08 with small upsides and capacity growth is not expected to match the demand growth. We expect prices to start softening from last quarter of CY08. We estimate CY07 realization to be at Rs3267 compared to CY06 realization of Rs2914, a growth of 12% and come down by 2% in CY08.
Cement volumes for Q4CY06 was up by 7% to 4.9mn ton and on sequential basis the volume growth was higher by 14.8%. Cement volumes has picked up post monsoon for ACC, but lagging behind the industry growth rate. For the full year also the volume growth has lagged behind at 7.8% compared to the industry growth rate of 11.3%. Clinker production for CY06 was higher by 2.7% at 13.1mn ton. Higher blending has increased cement production by 7.8% in CY06. We expect cement volume growth for CY07 and CY08 at 7% and 5% respectively with new capacities coming in. ACC is expanding its Lakheri facility by 0.6mn ton shortly and by adding grinding facilities at Kymore, Tikaria, Sindri and Wadi the overall capacity is expected to touch 23.1mn ton by end of CY07 from the present 20mn ton capacity.
Operating margin for Q4CY06 increased by 1340bps on y-o-y basis and by 230bps on sequential basis as cost per ton remained almost flat for the quarter whereas realisations picked up. We expect margins to grow in CY07 with improvement in realisations and possible reductions on power front as 25MW power plant is coming up at Lakheri shortly and another 30MW power plant is coming at the end of CY07 which will reduce power cost in CY08.
ACC’s CMP discounts the estimated CY07 and CY08 earnings by 13.5x and 14.4x respectively. We expect average cement prices to move by around 2-3% from the current levels in the country despite duty reductions. With incremental capacity lagging behind demand growth and possibility of imports not matching with the incremental growth due to pricing and logistical bottlenecks we expect cement prices to be higher till mid of CY08. We maintain our HOLD rating with a target of Rs1077. Our target price discounts CY08 earnings by 15x.