* Expansion plans are delayed from earlier guidance: ACC is currently
executing expansion plan of 7.3 mtpa at multiple locations, which are
currently delayed by c.3 months from the earlier guidance (see exhibit 2).
The major reason for delay in commissioning plants is due to problems with
civil construction and challenge in mobilizing qualified human resource at
multiple expansion projects. Our visit to multiple under construction
cement plants, confirms that the fate of most of the expansion plans across
the industry will be similar. Hence, we continue to believe that production
from incremental capacity will be limited compared to the rated capacity
addition announced by cement manufacturers.
Softness in cement prices visible: Cement prices have come down from
the peak of Rs260 in July 2009 to Rs253/bag currently. Management
expects cement prices to drop further during the festive season as the
construction activity will continue to be slow and is expected to pick up
from December 2009. We model cement realisations to drop by
c.Rs210/tonne in 2H CY09 over the realisations of Rs3,840/tonne in 2Q
CY09 for ACC. Additionally, we have factored a further drop of
c.Rs170/tonne in CY10E due to likely impact of incremental capacity
additions.
* Strong balance sheet to support expansion plan: ACC currently has
gross debt of c.Rs5 bn, Net Worth of c.Rs55 bn and cash/liquid investments
of c.Rs14 bn. The Company plans to refinance debt of c.Rs2.5 bn maturing
in December 2009 with issue of NCDs and is likely to maintain the current
gross debt levels. We believe that internal accruals coupled with cash/liquid
investments will help completing the expansion of cement capacity from
22.4 mtpa to 30.6 mtpa by 2H CY10E.
* Maintain Buy with price target of Rs985: With improving economic
outlook, return ratios (RoE/RoCE) comfortably above cost of capital and
relative cheap valuations, we believe that downside risk is limited in cement
stocks. We expect ACC to report RoCE of 26.3% and 18% in CY09/10E,
respectively after factoring fall in cement realisations drop of Rs210/tonne
and Rs170/tonne in 2H CY09/CY10E. We estimate EPS of Rs86.7 and
Rs72.9 for CY09/10E, respectively. Maintain buy and continue to value ACC
at EV/tonne of US$120 (30.6 mtpa capacity) and implied EV/EBITDA of 7.8x
and PE of 13.5x to arrive at our price target of Rs985.
* Maintain Buy with price target of Rs985: With improving economic outlook,
return ratios (RoE/RoCE) comfortably above cost of capital and relative cheap
valuations, we believe that downside risk is limited in cement stocks. We expect
ACC to report RoCE of 26.3% and 18% in CY09/10E, respectively after factoring
fall in cement realisations drop of Rs210/tonne and Rs170/tonne in 2H
CY09/CY10E. We estimate EPS of Rs86.7 and Rs72.9 for CY09/10E,
respectively. Maintain buy and continue to value ACC at EV/tonne of US$120
(30.6 mtpa capacity) and implied EV/EBITDA of 7.8x and PE of 13.5x to arrive at our price target of Rs985.
* Risk to our recommendation: Higher than estimated drop in realisations
due to oversupply scenario in 2H FY10/FY11 and manufacturers resorting to
undercutting price, is the primary risk to our recommendation.
| NIFTY 
