ACC's Q4CY10 operating results were significantly below our estimates with a margin of 16.3% as against our estimate of 23%. Although volumes picked up during the quarter, up 18.5% sequentially, realisations continued to suffer declining 2.5% YoY. This alongwith increase in employee expenses led to an 857bps YoY contraction in margins. A tax write back of Rs820mn helped the company post a net profit of Rs2.6bn.

Volume growth: Volumes in Q3CY10 had dropped significantly due to the heavy rainfall leading to slowdown in construction activity. During the current quarter volumes picked as the company reported a 18.5% QoQ growth to 5.6mn mt. However, growth in volumes was not accompanied by commensurate growth in realisations as over supply conditions in industry prevailed. Realisations during the quarter were flat QoQ at Rs3,510/mt despite production discipline in the industry. Revenues were up 5.3% YoY at Rs20.9bn.

Margin woes continue: Apart from lower realisations, profitability was impacted by higher employee costs. Employee costs were higher 26.6% QoQ largely due to provisioning related to employee benefit schemes. Sequentially, margins expanded by 318bps to 16.3%. A tax write back of Rs820 helped the company post a net profit of Rs2.6bn as aginst our estimate of Rs2.8bn.

Outlook: Considering the production discipline in Southern markets and lack of unsatisfactory demand pickup in Northern region, we have reduced our growth estimate for CY11 from 12% to 10%. We expect ACC to achieve a volume of 23.2mn mt in CY12. With realisations expected to remain under pressure, we have reduced our CY11 margin estimate by 640bps to 20.9% leading to reduction in CY11 earnings by 31% to Rs52.4. We expect cement industry to witness improvement post Q3CY11. We introduce CY12 estimates for the company with volume and earnings growth of 12% and 34% respectively.

VALUATIONS AND RECOMMENDATION

The stock is currently trading at 8.9x CY11E EV/EBITDA and EV/ mt of USD120. We maintain a `HOLD' rating on the stock with a revised target price of Rs901 (earlier Rs983) discounting CY11E EBITDA 8x.