Wednesday, April 20, 2011

INDIA: Accumulate ACC, target price Rs 156: Religare



The stock has outperformed the broader market by 28% over the past nine months.


Religare Capital has recommended accumulation of ACC for a target price of Rs 156.

The stock has outperformed the broader market by 28% over the past nine months. While Q1CY11 should be stronger led by margin expansion, we believe the current run-up in stock price already factors in most positives. “At 7.9x EV/EBITDA one-year forward and $140 EV/t (vs. $120 replacement cost), we see limited upside potential and therefore downgrade the stock to HOLD. In our view, near-term headwinds in terms of a decline in cement prices could provide investors with better entry points into large-cap stocks,” the brokerage said in a note.

Recent dealer checks suggest that prices have started to correct in most parts of India (except the south), by Rs 5–10 a bag. This follows a sharp price increase of Rs 25–60 a bag across regions over the past three months. “We believe prices could taper down further as we move towards seasonal weakness and this might weigh on stock sentiment,” the brokerage said in a note.

In its recent AGM, the management ruled out a merger of Ambuja Cement but pointed to acquisition and inorganic growth opportunities in the near future. Signalling its conviction in the strength of the base business, the promoter Holcim also recently increased its stake in the company to 49.3% from 46.2%.

“After two soft quarters, we expect ACC to report strong topline growth of 13.5% in Q1CY11 led by robust dispatch growth of 10–12% YoY (albeit over a low base) and modest realisation growth. We expect realisations to increase 9% QoQ, which will drive margins sequentially up by 840bps and EBITDA/t up by Rs 350–400,” the brokerage said.

The stock has outperformed the Sensex by 28 per cent over the past nine months. Valuations hold limited upside, with ACC trading close to 8x EV/EBITDA one-year forward. “We maintain our CY11/CY12 earnings estimates and believe that investors will have better opportunities to enter into large caps on seasonal corrections in stock prices,” it added.

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