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  1. 1. October 7, 2010 Recommendations <= 1 year 1 - 2 yrs 2 - 5 yrs ACC LTD SELL Strong Buy • ACC Ltd, a Switzerland based Holcim group company, is currently the second largest Buy cement manufacturer of the country with a capacity of 27.1mtpa after the recent merger Hold of Ultratech Cement. Reduce Sell • Of the total capacity, southern region accounts for 39%, while the northern, eastern, Strong Buy – Expected Returns > 20% p.a. central and western regions account for the remaining 21%, 19%, 17% and 4% Buy – Expected Returns from 10 to 20% p.a. Hold – Expected Returns from 0 % to 10% p.a. respectively. Reduce – Expected Returns from 0 % to 10% p.a. with possible downside risk • Volume growth for the company would be led by higher capacity utilization at the 2.7mt Sell – Returns < 0 % and 1.1mt of incremental capacity commissioned in Karnataka and Orissa, respectively, during the last 6-9 months. • ACC plans to commission power generation capacity of 90MW during 2010 which would STOCK DATA increase the total captive power generation capacity to 346MW by CY2010 increasing the BSE / NSE Code 500410/ ACC Bloomberg Code ACC IN EQUITY use of captive power from current 70% to nearly 80% by CY11. No. of Shares (Mn) 187.74 Sensex / Nifty 20,543 / 6,186 • The company has a strong balance sheet with debt-equity ratio of 0.1 and net cash of Rs PRICE DATA 13bn as on December 2009, which would enable smooth funding for its expansion plans CMP Rs (6th Oct'10) 1,026.6 Beta 0.65 and inorganic growth opportunities. Market Cap (Rs mn) 192,734 • We estimate ACC Ltd’s revenues to grow at a CAGR of 8.2% over CY2009-11 to Rs 98.3bn 52 Week High-low 1039 - 686 Average Daily Volume 88,836 by CY2011. We also estimate that PAT would decline to Rs 13bn in CY2011 from Rs 15.6bn STOCK RETURN (%) in CY2009. 30D 3M 6M 1Y ACC 14% 20% 8% 28% Based on an average of CY11E consolidated EV/EBITDA multiple of 6 and an Sensex 11% 17% 15% 21% Nifty 11% 17% 15% 23% EV/ tonne of USD 120, the fair value for the company works out to Rs 859. SHARE HOLDING PATTERN (%) Financial Snapshot Promoter 46.2 Projections (Rs Mn) CY07A CY08A CY09A CY10E CY11E Institution 33.5 Non Institution 20.3 Revenue 69,408 75,641 83,904 96,396 98,300 Total 100.0 Y-o-Y Growth % 20.4% 9.0% 10.9% 14.9% 2.0% 1 Year Price Performance (Rel. to Sensex) EBIDTA 23,130 19,853 27,285 29,298 26,155 35 Y-o-Y Growth % 17.1% -14.2% 37.4% 7.4% -10.7% 30 Sensex ACC PAT 14,275 10,996 15,639 16,395 13,314 25 Y-o-Y Growth % 15.1% -23.0% 42.2% 4.8% -18.8% 20 EPS Rs 72.5 55.1 79.3 87.3 70.9 15 BVPS Rs 221.6 256.8 312.3 400.0 470.9 10 EBIDTA % 33.3% 26.2% 32.5% 30.4% 26.6% 5 NPM % 20.6% 14.5% 18.6% 17.0% 13.5% 0 ROE % 32.7% 21.5% 25.4% 21.8% 15.1% -5 PER x 11.8 14.5 -10 P/B Ratio 2.6 2.2 -15 * Y/E December Page | 1
  2. 2. October 7, 2010 BUSINESS PROFILE ACC Ltd was established in 1939 as a result of a merger between ten cement companies belonging to prominent group like Tata, Khatau's, Killick Nixon and F E Din Shaw group. In 2000, Ambuja Cement acquired the stake held by the Tata's and ACC’s current capacity subsequently became the single largest shareholder in ACC. In 2005, ACC became part of the Swiss major Holcim Group of 27mtpa is expected to reach 30.7mt by the which had acquired the management control of Ambuja Cement. end of CY10. The company's operations are spread throughout the country with 16 modern cement factories, more than 40 Ready mix concrete plants, 20 sales offices, and several zonal offices. It has a workforce of about 9,000 persons and a countrywide distribution network of over 9,000 dealers. In order to focus on the core cement operations, ACC has over the years exited from the refractory business and divested its interest in various subsidiaries. With an operational capacity of 27.1mt, it is currently the second largest cement manufacturer in India after the recently merged Ultratech Cement. Nearly 60% of the capacities are in the southern & northern region while it has the lowest exposure in the western market. It operates under the ACC brand which is well established and commands a premium over regional brands. The company has also been acquiring stakes in smaller companies like 45% stake in Asian Cement (0.3mt) and 100% stake in Encore Cement (0.2mt). Annual Capacity Growth Current Capacity Break-up 35 30 16% 25 Capacity (mtpa) 20 4% 39% 15 10 19% 5 0 22% Cement Capacity South India North India East India West India Central India Expansion to lead to higher volume growth in the near-term …. ACC’s expansion at Chanda in Maharashtra, where the company is setting up a 3mtpa plant along with a 25MW Volume growth power plant for captive consumption is scheduled to be commissioned in Q4 CY10. The recently commissioned 1.1mt expected on stabilization of the unit at Orissa in Q4 CY09 and 2.7mt Karnataka grinding capacities in Q1 CY10 are expected to stabilize in a few months. recent capacity The remaining phase of the Karnataka programme including additional captive power generation capacity of 50 addition MW is expected to be completed by mid 2010. This, with the 15MW CPP at Bagarh plant will take the total captive power capacity to 346MW, which would cater to nearly 80% power requirements of the company. We estimate the total capex on these projects to be at Rs 28bn by the end of CY11. Page | 2
  3. 3. October 7, 2010 BUSINESS PERFORMANCE Dispatches to touch 25mt in CY11…. The consolidated revenue during the year ended December 2009 rose 10.9% to Rs 83.9bn as compared to the previous year ended December 2008. The sales volume grew marginally by 2.6% on a year-on-year basis. The EBITDA margin in Total Income to touch Rs 100bn in CY11 2009 was 32.5%, as against 26.2% in 2008, enabled by a combination of factors including higher prices and cost controls. The net profit after tax increased 42% to Rs 15.6bn during the year ended December 2009. During H1CY10, the consolidated revenue increased by just 1% to Rs 44bn as compared to the same period last year as inadequate availability of railway wagons lead the volumes lower by 3% to 10.85mt during the period. Annual Revenues & Margins Quarterly Performance 120000 35% 23000 40% 30% 22500 35% 100000 30% Revenues (Rs mn) 25% Revenues (Rs mn) 22000 Margins(%) Margins(%) 80000 25% 20% 21500 20% 60000 21000 15% 15% 40000 20500 10% 10% 20000 5% 20000 5% 19500 0% 0 0% Revenue (Rs mn) PAT Margins EBITDA Margins Net Revenue (Rs mn) EBITDA Margins Peer Group Comparison Revenue EBIDTA PAT Margin EV P/E P/B CMP FV Companies (Rs. mn) Margin (%) (%) ($/tonne) (x) (x) (Rs.) (Rs.) ACC 83,904 33% 19% 157 12.9 3.3 1027 10.0 Ambuja Cement 70,768 30% 17% 188 17.9 3.4 143 2.0 Ultratech Cement 71,750 29% 15% 136 12.6 3.0 1105 10.0 * Y/E Dec for ACC & Ambuja Cem, $/Re = 45 Peer Comparison We believe that the recent run-up in the cement stocks on account of cement price hikes (post monsoon) is Cement stocks trading unwarranted as the industry is still going through a scenario where oversupply concerns and rising input costs, led by at a significant premium to their higher coal prices and freight charges would keep realizations and margins under pressure. At current price levels, the replacement costs large companies (representing the Holcim & Aditya Birla Group, which together controls nearly 40% of the Indian cement industry) are trading significantly higher than replacement cost of USD 110-120. Page | 3
  4. 4. October 7, 2010 VALUATION We estimate ACC Ltd’s revenues to grow at a CAGR of 8.2% over CY2009-11 to Rs 98.3bn by CY2011. We also estimate that PAT would decline to Rs 13bn in CY2011 from Rs 15.6bn in CY2009. Based on an average of CY11E consolidated EV/EBITDA multiple of 6 The industry has added over 70mt in the last two years to reach the current levels of nearly 270mt and is and an EV/ tonne of USD expected to further add 30mt by FY11. We believe that the stabilization of the recent capacity addition would 120, the fair value for the company works out to Rs lead to an oversupply situation raising concerns over sustainability of the recent price hikes. In addition, coal 859. prices are expected to be firm amid shortages. Based on an average of CY11E consolidated EV/EBITDA multiple of 6 and an EV/ tonne of USD 120, the fair value for the company works out to Rs 859. We recommend a ‘SELL’ rating on the stock. Financial Analysis and Projections Fair Value Calculation EV/ tonne method EV/ EBITDA method Particulars (Rs Mn) CY07A CY08A CY09A CY10E CY11E EV / tonne ($) 120 EV / EBITDA multiple 6.0 Net Revenue 69,408 75,641 83,904 96,396 98,300 CY11E Capacity (mtpa) 30.7 CY11E EBITDA (Rs mn) 26,155 Other Income 3,806 3,229 2,662 3,374 3,440 EV (Rs Mn) 165,618 EV (Rs mn) 156,931 Total Income 73,215 78,870 86,566 99,770 101,740 CY11E Net Cash (Rs mn) 8,382 CY11E Net Cash (Rs mn) 8,382 Operating Expenditure 50,084 59,017 59,281 70,472 75,585 Equity Value (Rs mn) 174,000 Equity Value (Rs mn) 148,549 Depreciation 3,130 3,205 3,731 4,743 5,349 EBIT 20,000 16,648 23,553 24,555 20,806 Fair Value (Rs per share) 927 Fair Value (Rs per share) 791 Average Value (Rs per share) 859 EBIT Margin (%) 28.8% 22.0% 28.1% 25.5% 21.2% Interest 744 400 1,047 1,134 1,786 Profit Before Tax 19,256 16,248 22,506 23,421 19,020 Less: Tax 4,981 5,252 6,868 7,026 5,706 Profit After Tax 14,275 10,996 15,639 16,395 13,314 PAT Margin (%) 20.6% 14.5% 18.6% 17.0% 13.5% ROE (%) 32.7% 21.5% 25.4% 21.8% 15.1% EPS (Rs) 72.5 55.1 79.3 87.3 70.9 BVPS (Rs) 221.6 256.8 312.3 400.0 470.9 Valuation Ratios (x) CY10E CY11E P/E 11.8 14.5 P/B 2.6 2.2 * Y/E December Page | 4
  5. 5. October 7, 2010 Board Of Directors Director Name Current Position Description Mr. N. S. Sekhsaria serves as Non-Executive Chairman of the Board of ACC Ltd. Mr. Sekhsaria is the Founder-Promoter and current Chairman of Ambuja Cements Limited. Mr. Sekhsaria was invited to join the ACC Board in 1999 and was appointed Deputy Chairman from January 2000. He took over as its Chairman in January 2006. Mr. Sekhsaria built N S Sekhsaria Chairman Ambuja Cement into a benchmark for Indian Industry. His acumen as an entrepreneur and technocrat turned Ambuja into the most efficient and profitable cement company in India and redefined industry practices by changing the perception of cement from a commodity to a branded product. Under his leadership, ACC has achieved improvements in the areas of project management, logistics and overall cost-competitiveness. Mr. Paul Hugentobler serves as Non-Executive Deputy Chairman of the Board of ACC Ltd. He obtained a degree in Civil Engineering from the ETH, Zurich, and a degree in Economic Science from the University of St. Gallen. He joined Holcim Group Support Limited in 1980 as Project Manager and in 1994 was appointed as Area Manager for Holcim Paul Hugentobler Deputy Chairman Limited. From 1999 until 2000, he also served as CEO of Siam City Cement, Bangkok, Thailand. He has been a Member of the Executive Committee since January 1, 2002 with the responsibility for South Asia and ASEAN excluding Philippines. He has been appointed as Vice Chairman of Ambuja Cements Limited with effect from September 24, 2009. Mr. Kuldip Kaura has been appointed as Chief Executive Officer, Managing Director of ACC Ltd with effect from August 13, 2010. He was Non-Executive Independent Director of the Company. Mr. Kaura holds a degree in Mechanical Engineering, BE (Hons.) from Birla Institute of Technology & Science, Pilani and had also attended various Managing Director Kuldip Kaura Executive Education Programmes at London Business School and Swedish Institute of Management, Stockholm. Mr. & CEO Kaura has experience in businesses and companies in diverse sectors such as power, natural resources, metals, mining etc. and has deep understanding of Corporate Governance, brand building and Sustainable Development in India, U.K. and U.S. Regulatory Environment. He is presently Advisor with Vedanta Resources Plc. Mr. Sam Palia serves as Non-Executive Independent Director of ACC Ltd. Mr. Palia is a Development Banker by profession. He was with IDBI from 1964-1989 during which period he held various responsible positions including that of an Executive Director. He has also acted as an Advisor to Industrial Bank of Yemen, Saana (North Yemen) and Industrial Bank of Sudan, Khartoum (Sudan) under World Bank assistance programmes. He was also the Managing Sam Palia Director Director of Kerala Industrial & Technical Consultancy Organization Limited, set up to provide consultancy service to micro enterprises and small and medium enterprises. He is a Director on the Boards of companies viz. Tata Steel Limited, Tata Motors Limited, Bombay Dyeing & Manufacturing Co. Limited. He is Chairman-Emeritus of Rashtriya Gramin Vikas Nidhi and a Trustee of Bombay Community Public Trust. Mr. Naresh Chandra serves as Non-Executive Independent Director of ACC Ltd. He is a post graduate in mathematics from Allahabad University. He was a distinguished member of the Indian Administrative Service (IAS) and former Cabinet Secretary to the Government of India. He has held various important positions including that of Governor of Naresh Chandra Director the State of Gujarat and India’s Ambassador to the United States of America. He has served on numerous important Committees including as Chairman of Corporate Governance Committee instituted by the Government of India. Mr. Naresh Chandra, is Chairman of Committee of Civil Aviation Policy, Ministry of Civil Aviation. He is a Director on the Boards of various companies. In the year 2007, he was honoured with Padma Vibhushan by the Government of India. Page | 5
  6. 6. October 7, 2010 Board Of Directors Contd... Mr. Markus Akermann serves as Non-Executive Director of ACC Ltd. He is the Chief Executive Officer and member of the Board of Directors of Holcim Limited. He obtained a degree in Business Economics from the University of St. Gallen in 1973 and studied Economic and Social Sciences at the University of Sheffield, U.K. Mr. Akermann began his professional career in 1975 with the former Swiss Bank Corporation. In 1978, he moved to Holcim where he was Markus Akermann Director active in a number of roles including Area Manager for Latin America and Holcim Trading. In 1993, he was appointed to the Executive Committee with responsibility for Latin America and international trading activities. On January 1, 2002, he was appointed Chief Executive Officer and at the Annual General Meeting in 2002, he was elected to the Board of Directors of Holcim Limited. Mr. M.L. Narula serves as Non-Executive Director of ACC Ltd. He is a Graduate from Punjab University and Fellow, Institute of Engineers. Mr. Narula has been closely associated with the Company for over 45 years in various senior positions in plant and Corporate Office including that of Wholetime Director since April 1996 and was the Managing M L Narula Director Director of the Company from December 1, 2002 till his retirement on March 31, 2007. Mr. Narula has experience and in depth knowledge of the Cement Industry. He is presently a Non-Executive Director on the Company’s Board with effect from April 1, 2007. Mr. Narula is also a Director on the Boards of other Indian and Foreign Companies and Senior Advisor to Holcim Group Services, Zurich, Switzerland. Mr. R. A. Shah serves as Non-Executive Independent Director of ACC Ltd. He is a Solicitor and a Senior Partner of M/s. Crawford Bayley and Co., a firm of Advocates & Solicitors. He specializes in a broad spectrum of corporate laws in general, with special focus on Foreign Investments, Joint Ventures, Technology and License Agreement, Intellectual R A Shah Director Property Rights, Mergers and Acquisitions, Industrial Licensing, Anti Trust Laws, Company Law and Taxation. He is a Director on the Board of various public limited companies and is Chairman of the Board in many of these companies. He is also on the Audit Committee of some of the companies on which he is a Director. Mr. Shailesh V. Haribhakti serves as Non-Executive Independent Director of ACC Ltd. He is Fellow Chartered Accountant. Mr. Shailesh Haribhakti is the Executive Chairman of BDO Consulting Pvt. Ltd. He served a three year term on the Standards Advisory Council of the International Accounting Standards Board. He is a Committee Shailesh Haribhakti Director Member of Futures & Options segment of National Stock Exchange of India Limited and a Member of the SEBI Committee on Disclosures and Accounting Standards. He serves as Member of Managing Committees of ASSOCHAM and IMC and Corporate Governance Committees of ASSOCHAM and CII and is Chairman of the Global Warming Committee of IMC. He is on the Board of Directors of several listed and private companies. Mr. Aidan John Lynam has been appointed as a Director of ACC Limited with effect from April 22, 2010. He holds a degree in Engineering from the University College of Dublin and an MBA from IMD, Lausanne, Switzerland. In addition to the above, he holds the following Professional Memberships: Member of the Institute of Engineers in Ireland (MIEI), Chartered Member of the British Institute of Manufacturing Engineers (C.Eng. M.I.E.E), Board Member Aidan Lynam Director (2009) of European Chamber of Commerce in Vietnam. Mr. Lynam is presently in the services of Holcim Limited and is Area Manager responsible for Vietnam, Sri Lanka, Bangladesh, Singapore, Malaysia and Cambodia. He is also regionally responsible for the OH&S and Geocycle core groups of Holcim and the Holcim South East Asia IT Shared Service Centre. Mr. Dinesh Kumar Mehrotra serves as Non-Executive Independent Director - Nominee of LIC of ACC Ltd. Mr. Mehrotra is the Managing Director of Life Insurance Corporation of India (LIC) and is also a director on the Board of D K Mehrotra Nominee (LIC) Directors of some of LIC’s subsidiary companies within and outside India and other public limited companies. He represents LIC on the ACC Board. Page | 6