Hold stocks of ACC; target of Rs 1220

ACC, after a dismal CY09-10 volume growth (where volumes barely grew at 1%) ACC took off and registered volume growth of 11% in CY11 i.e. 2X the industry growth rate. However the company volume growth plummeted to 2% in April-May 2012. We met ACC’s management to understand key reason for company’s slower volume growth and also take stock of recent competitive pricing scenario. The company expects aggregate cement demand to increase at rate higher than GDP (with GDP growth expectation of 6.5-7%). In FY12 cement demand grew 6.5% yoy in line with GDP growth. However over last 6 months (Dec-11 to May-12), ACC’s volumes growth has averaged ~6% yoy which is significantly lower than the 12% yoy growth recorded by its peers (Top-5) and also lower than 10.3% yoy recorded by industry.”

“The company highlighted that the two key reasons for its volume underperformance is a) increasing competitive intensity from Tier- II brands particularly in Southern and Eastern region and b) sand mining ban impacting volumes in states like Andhra Pradesh, Punjab & Haryana. This has lead to ACC losing market share which currently stands at 10.5% 2QCY12YTD as compared to 11.2% in CY11. The company expects that given current scenario it will be difficult to achieve volume growth expectation of 9-10%.”
“In our May-12 sector update we had highlighted that All India Cement prices in May down were down 4% over recent peaks. Usually in May pricing scenario remains benign as the construction activities peak before the onset of monsoon. The pricing trend is surprising given the fact that May volume growth (top 5 players grew 14% yoy) was much stronger than better than April-12 growth of (Top 5 players 5%). ACC management highlighted that the surplus capacity in the industry remains high and the recent increase in share of Tier ��" II brands has led to increasing competitive intensity which in turn has negatively impacted cement prices in May-12. We notice that in 1QCY12 Top 5 players on an average grew 6% higher than the reaming players in the industry. However in April-12 dispatch growth for the top 5 player’s stood at 5% vs 9.8% for the remaining industry, clearly indicating market share gains for smaller players.”

“We downgrade our earnings estimates for CY12E and CY13E by 6.3% & 3.9% led by lower volumes assumption. We also lower our target price for ACC to Rs1220 (Rs1260 earlier) to factor in earnings downgrade. Though we still maintain ACC as our relative preferred pick vs Ultratech, on an absolute basis stock’s valuations at 8.2X EV/E & EV/T of USD126 for CY13 numbers leaves little upside from current levels. Maintain HOLD