acc ltd : sell
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October 7, 2010
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ACC LTD SELL
• ACC Ltd, a Switzerland based Holcim group company, is currently the second largest
cement manufacturer of the country with a capacity of 27.1mtpa after the recent merger
of Ultratech Cement.
• Of the total capacity, southern region accounts for 39%, while the northern, eastern,
central and western regions account for the remaining 21%, 19%, 17% and 4%
respectively.
• Volume growth for the company would be led by higher capacity utilization at the 2.7mt
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
increase the total captive power generation capacity to 346MW by CY2010 increasing the
use of captive power from current 70% to nearly 80% by CY11.
• The company has a strong balance sheet with debt-equity ratio of 0.1 and net cash of Rs
13bn as on December 2009, which would enable smooth funding for its expansion plans
and inorganic growth opportunities.
• 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 and an
EV/ tonne of USD 120, the fair value for the company works out to Rs 859.
Recommendations <= 1 year 1 - 2 yrs 2 - 5 yrs
Strong Buy
Buy
Hold
Reduce
SellStrong Buy – Expected Returns > 20% p.a.
Buy – Expected Returns from 10 to 20% p.a.
Hold – Expected Returns from 0 % to 10% p.a.
Reduce – Expected Returns from 0 % to 10% p.a. with possible downside
risk
Sell – Returns < 0 %
-15
-10
-5
0
5
10
15
20
25
30
35
Sensex ACC
STOCK DATABSE / NSE Code
Bloomberg Code
No. of Shares (Mn)
Sensex / Nifty
PRICE DATA
CMP Rs (6th Oct'10)
Beta
Market Cap (Rs mn)
52 Week High-low
Average Daily Volume
STOCK RETURN (%)
30D 3M 6M 1Y
ACC 14% 20% 8% 28%
Sensex 11% 17% 15% 21%
Nifty 11% 17% 15% 23%
SHARE HOLDING PATTERN (%)Promoter
Institution
Non Institution
Total
1 Year Price Performance (Rel. to Sensex)
33.5
20.3
100.0
0.65
192,734
1039 - 686
88,836
46.2
500410/ ACC
ACC IN EQUITY
187.74
20,543 / 6,186
1,026.6
Financial SnapshotProjections (Rs Mn) CY07A CY08A CY09A CY10E CY11E
Revenue 69,408 75,641 83,904 96,396 98,300
Y-o-Y Growth % 20.4% 9.0% 10.9% 14.9% 2.0%
EBIDTA 23,130 19,853 27,285 29,298 26,155
Y-o-Y Growth % 17.1% -14.2% 37.4% 7.4% -10.7%
PAT 14,275 10,996 15,639 16,395 13,314
Y-o-Y Growth % 15.1% -23.0% 42.2% 4.8% -18.8%
EPS Rs 72.5 55.1 79.3 87.3 70.9
BVPS Rs 221.6 256.8 312.3 400.0 470.9
EBIDTA % 33.3% 26.2% 32.5% 30.4% 26.6%
NPM % 20.6% 14.5% 18.6% 17.0% 13.5%
ROE % 32.7% 21.5% 25.4% 21.8% 15.1%
PER x 11.8 14.5
P/B Ratio 2.6 2.2
* Y/E December
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October 7, 2010
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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 subsequently became the single largest shareholder in ACC. In 2005, ACC became part of the Swiss major Holcim Group
which had acquired the management control of Ambuja Cement.
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).
ACC’s current capacity of 27mtpa is expected to reach 30.7mt by the end of CY10. Volume growth expected on stabilization of the recent capacity addition
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
power plant for captive consumption is scheduled to be commissioned in Q4 CY10. The recently commissioned 1.1mt
unit at Orissa in Q4 CY09 and 2.7mt Karnataka grinding capacities in Q1 CY10 are expected to stabilize in a few months.
The remaining phase of the Karnataka programme including additional captive power generation capacity of 50
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.
BUSINESS PROFILE
39%
22%
19%
4%
16%
Current Capacity Break-up
South India North India East India
West India Central India
0
5
10
15
20
25
30
35
Cap
acity (m
tpa)
Annual Capacity Growth
Cement Capacity
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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
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.
Total Income to touch Rs 100bn in CY11 Cement stocks trading at a significant premium to their replacement costs
Peer Comparison
We believe that the recent run-up in the cement stocks on account of cement price hikes (post monsoon) is
unwarranted as the industry is still going through a scenario where oversupply concerns and rising input costs, led by
higher coal prices and freight charges would keep realizations and margins under pressure. At current price levels, the
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.
BUSINESS PERFORMANCE
0%
5%
10%
15%
20%
25%
30%
35%
0
20000
40000
60000
80000
100000
120000
Margins(%
)
Revenues (Rs mn)
Annual Revenues & Margins
Revenue (Rs mn) PAT Margins EBITDA Margins
0%
5%
10%
15%
20%
25%
30%
35%
40%
19500
20000
20500
21000
21500
22000
22500
23000
Margins(%
)
Revenues (Rs mn)
Quarterly Performance
Net Revenue (Rs mn) EBITDA Margins
Peer Group Comparison
CompaniesRevenue
(Rs. mn)
EBIDTA
Margin (%)
PAT Margin
(%)
EV
($/tonne)
P/E
(x)
P/B
(x)
CMP
(Rs.)
FV
(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, $/Re = 45
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October 7, 2010
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Based on an average of CY11E consolidated EV/EBITDA multiple of 6 and an EV/ tonne of USD 120, the fair value for the company works out to Rs 859.
VALUATION
We estimate ACC Ltd’s revenues to grow at a CAGR of 8.2% over CY2009-11 to Rs 98.3bn by CY2011. We
also estimate that PAT would decline to Rs 13bn in CY2011 from Rs 15.6bn in CY2009.
The industry has added over 70mt in the last two years to reach the current levels of nearly 270mt and is
expected to further add 30mt by FY11. We believe that the stabilization of the recent capacity addition would
lead to an oversupply situation raising concerns over sustainability of the recent price hikes. In addition, coal
prices are expected to be firm amid shortages.
Based on an average of CY11E consolidated EV/EBITDA multiple of 6 and an EV/ tonne of
USD 120, the fair value for the company works out to Rs 859.
We recommend a ‘SELL’ rating on the stock.
Financial Analysis and Projections
Particulars (Rs Mn) CY07A CY08A CY09A CY10E CY11E
Net Revenue 69,408 75,641 83,904 96,396 98,300
Other Income 3,806 3,229 2,662 3,374 3,440
Total Income 73,215 78,870 86,566 99,770 101,740
Operating Expenditure 50,084 59,017 59,281 70,472 75,585
Depreciation 3,130 3,205 3,731 4,743 5,349
EBIT 20,000 16,648 23,553 24,555 20,806
EBIT Margin (%) 28.8% 22.0% 28.1% 25.5% 21.2%
Interest 744 400 1,047 1,134 1,786
Profit Before Tax 19,256 16,248 22,506 23,421 19,020
Less: Tax 4,981 5,252 6,868 7,026 5,706
Profit After Tax 14,275 10,996 15,639 16,395 13,314
PAT Margin (%) 20.6% 14.5% 18.6% 17.0% 13.5%
ROE (%) 32.7% 21.5% 25.4% 21.8% 15.1%
EPS (Rs) 72.5 55.1 79.3 87.3 70.9
BVPS (Rs) 221.6 256.8 312.3 400.0 470.9
Valuation Ratios (x) CY10E CY11E
P/E 11.8 14.5
P/B 2.6 2.2
* Y/E December
Fair Value Calculation
EV/ tonne method EV/ EBITDA method
EV / tonne ($) 120 EV / EBITDA multiple 6.0
CY11E Capacity (mtpa) 30.7 CY11E EBITDA (Rs mn) 26,155
EV (Rs Mn) 165,618 EV (Rs mn) 156,931
CY11E Net Cash (Rs mn) 8,382 CY11E Net Cash (Rs mn) 8,382
Equity Value (Rs mn) 174,000 Equity Value (Rs mn) 148,549
Fair Value (Rs per share) 927 Fair Value (Rs per share) 791
Average Value (Rs per share) 859
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Board Of Directors
Director Name Current Position Description
N S Sekhsaria Chairman
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
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.
Paul Hugentobler Deputy Chairman
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
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.
Kuldip Kaura Managing Director
& CEO
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
Executive Education Programmes at London Business School and Swedish Institute of Management, Stockholm. Mr.
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.
Sam Palia Director
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
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.
Naresh Chandra Director
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
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.
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Board Of Directors Contd...
Markus Akermann Director
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
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.
M L Narula Director
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
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.
R A Shah Director
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
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.
Shailesh Haribhakti 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
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.
Aidan Lynam Director
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
(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.
D K Mehrotra Nominee (LIC)
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
Directors of some of LIC’s subsidiary companies within and outside India and other public limited companies. He
represents LIC on the ACC Board.