9 October 2013
Update | Sector: Cement
ACC
BSE Sensex
19,984
S&P CNX
5,928
CMP: INR1,127
TP: INR1,313
Upgrade to Buy
Synergy benefits to drive profitability
Superior EPS CAGR, uptick in RoE make stock ripe for re-rating
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
ACC IN
187.7
1,515/912
13/-11/-28
211.8
3.4
Better synergy play without issue of hold-co discount and with stronger B/S
Clarity on growth plan should address inventors’ concern and enrich market mix
Potential creeping acquisition to support stock price
Synergies to narrow profitability gap; EPS growth to be higher than peers
Upgrade to Buy with TP of INR1,313 (CY14E EV of USD100/ton), 16% upside
Better vehicle to play synergy benefits
Financial Snapshot (INR b)
Y/E DEC
2012 2013E 2014E
Sales
111.3 110.4 122.9
EBITDA
NP
Adj. EPS
(INR) (%)
EPS Gr.
BV/Sh (INR)
RoE (%)
RoCE (%)
Payout (%)
Valuations
P/E (x)
P/BV (x)
EV/EBITDA
( )
EV/Ton (x)
16.4
2.9
9.0
94
20.2
2.5
10.5
88
17.2
2.3
8.3
82
19.7
12.9
68.7
14.1
393
17.7
23.5
61.8
15.8
10.5
55.8
-18.8
455
13.1
17.5
61.1
18.6
12.3
65.5
17.4
480
14.0
18.9
62.1
Acquisition of ACC by ACEM would drive synergies of ~INR4.5b each to be
realized over 2-3 years, driving 5%/10%/16% EPS accretion for ACC in
CY14/15/16. We believe ACC is a better vehicle to play these synergies, without
issues of cash outflow (for acquisition) or hold-co discount.
Clarity on growth plans – to add 8m tons in Central and East India
Post the announcement of ACC’s acquisition by ACEM, Holcim clarified that of
its total capacity addition of ~14m tons planned for India, ~8m tons would be in
ACC. While these plans would fructify over CY15-18, they would strengthen the
geography mix of ACC’s capacities – the contribution of Central and East India
would increase from ~37% in CY13 to ~50% by CY17/CY18.
Creeping acquisition potential to support stock price
Potential creeping acquisition by ACEM to re-align Holcim’s economic interest
in both the companies would support stock price. It intends to acquire up to
10% stake over 24 months and in-principle approval of ACEM’s Board is in place
for a maximum amount of INR30b (implies 40% premium to ACC’s CMP).
Shareholding Pattern (%)
As on
Promoter
Dom. Inst
Foreign
Others
Jun-13 Mar-13 Jun-12
50.6
10.2
32.0
7.3
50.6
8.6
33.5
7.4
50.2
12.4
29.9
7.5
Profitability gap to narrow, EPS CAGR to be higher than peers
Synergy-led narrowing of profitability gap (from ~INR260/ton in CY13 to
~INR114/ton by CY16), superior earnings growth (29% CAGR over CY13-16 v/s
17-19% for its large peers), improvement in capital efficiency (by 3-4pp by CY16)
and strongest balance sheet among peers makes ACC ripe for re-rating.
Dividend payout would remain healthy, as it would be welcomed by parent
(ACEM) to support its cash outgo commitments.
Stock Performance (1-year)
Valuing at CY14E EV of USD100/ton; upgrade to Buy
We are yet to formally incorporate benefits of synergies. However, based on
our ballpark estimates, the stock trades at 16.6x CY14E EPS, and at an EV of 8x
CY14E EBITDA and USD83/ton. As the full benefits of synergies would percolate
only after CY15, we shift to asset-based valuation for ACC and upgrade to
Buy,
with a target price of INR1,313 (EV of 9.75x CY14E EBITDA and ~USD100/ton).
Jinesh Gandhi
(Jinesh@MotilalOswal.com); +91 22 3982 5416
Sandipan Pal
(Sandipan.Pal@MotilalOswal.com); +91 22 3982 5436
Investors are advised to refer through disclosures made at the end of the Research Report.