A Mixed Bag

A Mixed Bag

Out of all the cement companies that have declared their results, Vaibhav Agarwal of PhillipCapital takes a closer look at the numbers declared by market heavyweights ACC Ltd and Dalmia Bharat.

ACC Ltd
Unfortunately, competition is far ahead!

  • ACC's Q4 numbers are better than our estimates on the EBITDA front by 23 per cent, but lower than consensus by 10 per cent. We were the lowest on the Street for ACC.
  • The key surprise has come in from better than expected realisations (+3 per cent versus our expectations) for ACC. Operating cost increased by 4 per cent y-o-y; 3 per cent q-o-q. We had questioned ACC's ability to maintain cost structure at Q1 levels in our earlier notes (in Q1;16 ACC delivered an excellent cost matrix and disappointments began Q2 onwards). The Q4 numbers, ACC lacks the cost advantage versus its peers.
  • Volume growth remains exactly in line with our expectation at -9.2 per cent y-o-y; +7.5 per cent q-o-q. EBITDA/tonne is reported at Rs 354 (-1 per cent y-o-y; -20 per cent q-o-q).
  • ACC continues to remain the worst amongst lot. Since the consolidation of ACC with Ambuja is complete, we expect some synergy benefits to flow in now.
  • The Board has recommended a final dividend of Rs 6/share (including interim dividend - dividend for CY16 stands at Rs 17/share).
  • Our price target, Rs 1,430 for ACC with a sell rating.

Key highlights
ACC has once again disappointed due to absence of volume growth and lower-than-expected operating efficiency. Consolidation with Ambuja may help ACC to improve cost efficiencies.
The only rerating trigger will be a sustained recovery in cement prices.

Outlook and valuation
We upgrade to 'Neutral' as our earlier price target with a 'Sell' rating is now met. ACC desperately needs to focus on cost efficiencies. Competition is far ahead on the operating front; hence, we don't see ACC matching peer valuations in the near to medium term. At our target of Rs 1,580, ACC trades at $135/tonne (nearly at par with replacement) which is fair, especially given that it is much lower on the efficiency curve.

Dalmia Bharat (DBEL IN)

  • The positive surprise continues despite demonetisation
  • Dalmia Bharat once again beats our/consensus estimates by 5 per cent/4 per cent on the operating front. These results continue to prove that the impact of demonetisation was minimal on the cement industry.
  • Volumes grew by 20 per cent y-o-y; 4 per cent q-o-q as against our expectation of 16 per cent y-o-y growth. EBITDA at Rs 4.21 billion beats all estimates. EBITDA/tonne at Rs 1,183 is ahead of our expectation by 1 per cent.
  • Cost controls continue to remain excellent.
  • We reiterate Dalmia Bharat amongst our high conviction mid-cap picks and with price target of Rs 2,500 (+30 per cent).

Key highlights
It continues to maintain a robust trajectory and we see no material risk to our estimates. The focus remains on operating leverage with capacity utilisation. Earnings upgrades cannot be ruled out as and when we see cement prices recovering especially in East/ Northeast India.

Outlook and valuation
We reiterate DBEL as our high conviction pick and maintain our price target at Rs 2,500 with potential for upgrades. DBEL will trade at ~ $185/tonne, bridging its valuation gap with comparable and most efficient cement majors. We see no reason for a discount given that DBEL's operating efficiencies match or are ahead of others.

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