ACC quarter results

While 2Q08 EBITDA was disappointing, we believe ACC’s EV/tonne of US$94.7 (25% discount to replacement cost) largely captures the grim near-term earning outlook. We cut earnings by 9% for 2008F and 26% for 2009F and, thus, our target price to Rs689. We think the stock still offers value at current levels, hence we maintain our Buy call.

2Q08 results disappoint, partly due to one-off factors
ACC’s volumes fell 1.3% in 2Q08 vs 9.4% growth reported in 1Q08. The decline was due to the 45-day shutdown in its Chaibasa unit due to technical problems. ACC also received 5% less coal from its assured supplier Coal India, forcing it to purchase coal from the open market at a 200% premium to Coal India’s price. As a result, EBITDA fell 24%. The decline in volumes and higher coal costs caused EBITDA/tonne to drop to Rs782 in 2Q08, from Rs871 in 1Q08.

Volume outlook should improve; financial position remains strong
ACC is scheduled to commission 4mmt of cement capacity in 2009, with the 1mmt Bargarh unit and the 3mmt New Wadi unit coming on stream. We estimate this will drive volume growth of 9% in 2010. Besides, ACC's financial position is significantly better now than it was during the last cyclical downturn in cement (1998-2000). It was in net cash as at end-2007, compared to a debt:equity of 126% in 2000. Even after accounting for the planned capex of Rs25bn over the next two years to raise capacity by 7.2mmt, we estimate debt:equity at only 6% for 2010. ACC has unlocked significant value by disposing of all non-core assets in the past five years.

Cement prices could come under pressure in 2009
We forecast incremental capacity addition of 75.6mmt through 2009 vs incremental demand growth of 39.8mmt. With most of the capacity to be commissioned in 2008, we should see full production in 2009. Hence, we foresee a surplus of 23.6mmt in 2009, representing 9% of industry capacity. We factor in a 5% drop in average prices in 2010 and, thus, expect EBITDA/t to fall from Rs797 in 2008 to Rs640 in 2009.

Trades at a 25% discount to replacement cost with no financial leverage
We cut our 2008F EPS by 9% on weak 2Q08 performance. We reset our DCF-based target price to Rs689 (from Rs906) to reflect the EPS cut and a higher risk-free rate (up 1% to 9%). We see no earnings momentum in the near term, but we think the stock offers value at 9x 2009F PE.