UltraTech Cement (ULTCEM) 2674

Transcription

1 Result Update Rating matrix Rating : Buy Target : 36 Target Period : 9-12 months Potential Upside : 35% What s changed? Target Price Unchanged EPS FY16E Changed from 76.6 to 82.2 EPS FY17E Changed from 93.8 to 1.5 Rating Unchanged Quarterly performance Q3FY16 Q3FY15 YoY (%) Q2FY16 QoQ (%) Revenue 5, , , EBITDA 1, EBITDA (%) bps bps PAT Key financials Crore FY14 FY15 FY16E FY17E Net Sales EBITDA Net Profit EPS ( ) Valuation summary FY14 FY15 FY16E FY17E PE (x) EV to EBITDA (x) EV/Tonne(US$) Price to book (x) RoNW (%) RoCE (%) Stock data Particular Amount Mcap crore Debt (FY15) 7574 crore Cash & Invest (FY15) 2916 crore EV 7833 crore 52 week H/L 3399 / 253 Equity cap crore Face value 1 Price performance 1M 3M 6M 12M ACC Ambuja Cement Shree Cement UltraTech Cement Research Analyst Rashesh Shah rashes.shah@icicisecurities.com Devang Bhatt devang.bhatt@icicisecurities.com January 21, 216 UltraTech Cement (ULTCEM) 2674 Cost efficiency drives margin expansion Standalone revenues increased 4.7% YoY (up 2.3% QoQ) to 5,747.3 crore (vs. I-direct estimate: 5,665.4 crore) due to 7.1% YoY growth in volumes to 11.6 MT (vs. I-direct estimate of 11.4 MT) led by capacity expansion. Realisation declined 2.2% YoY to 4,955 (vs. I-direct estimate of 4,953) due to pricing pressure across regions EBITDA/tonne increased 15.2% YoY in Q3FY16 to 9/tonne (vs. I- direct estimate: 833/tonne) due to a decline in power & fuel costs as there was an increase in pet coke consumption (from 51% to 74% YoY in fuel mix). RM cost during the quarter increased due to DMF levy The management expects amendment to the MMRD Act to get passed in the upcoming Budget session. It expects consolidation of acquired Madhya Pradesh units of Jaiprakash Associates by Q1FY17 end Largest pan-india player in cement industry UltraTech Cement is the largest player in capacity terms (~64.7 MT) with a market share of over ~18% in India. The company has consistently remained ahead of its peers in terms of capacity expansion with a CAGR of 23% vs. peer s CAGR of 13% in the past five years. In Q2FY16, UltraTech commissioned the 1.6 MT grinding unit at Jhajjar, Haryana and 1.6 MT grinding unit at Dankuni, West Bengal. The management has also indicated that the Bihar and Maharashtra grinding unit (1.6 MT each) is expected to be commissioned by March 216. Further, with ongoing organic, inorganic expansion, total capacity is set to reach ~72.8 MT (consolidated capacity at 75.8 MT) by FY17E while industry capacity is expected to grow at a modest pace in the next three years. This, in turn, is expected to help the company further gain its leadership position, going forward. Green shoots visible in infra spending We expect the company to grow at a higher rate than the industry in coming years led by capacity expansion. Some green shoots of recovery in demand from big-ticket infra projects are visible in North and South. Further, in the East sustained infra spending in Odisha, Bihar and Chhattisgarh are expected to continue to drive volume growth in Q4FY16 and FY17. In south, the company expects demand from Seemandhra and Telangana to pick up in FY17. UltraTech, being the largest pan-india player, would be one of the major beneficiaries of a demand recovery. Operating efficiency to drive margins In Q3FY16 total cost/tonne declined 5.4% YoY led by lower energy cost. Cost/tonne is expected to come down further led by commissioning of grinding units (in Haryana, West Bengal, Maharashtra and Bihar) coupled with power cost savings driven by decline in pet coke prices, higher share of WHRMS and increased use of pet coke (currently 74% that can go up to 8-9%). The full benefit of cost benefit will be reflected in Q4FY16 and FY17. Well positioned to reap benefits of recovery in demand! With the government s focus on infrastructure and a gradual revival in housing demand led by stable housing prices and the Seventh Pay Commission, cement demand is expected to improve, going forward. We assign premium valuations multiple to UltraTech vs. its peer companies due to industry-leading growth (on the back of consistent capacity additions), higher margins and healthy cash flows. Hence, we continue to maintain our positive view on the stock with a BUY recommendation and a target price of 3,6/share (i.e. at 2.x FY17E EV/EBITDA and EV/tonne of $225/tonne). ICICI Securities Ltd Retail Equity Research

2 Variance analysis Q3FY16 Q3FY16E Q3FY15 YoY (%) Q2FY16 QoQ (%) Comments Net Sales 5, , , , The revenue growth was driven by 7% YoY increase in volumes (led by capacity expansion) Other Incomes Raw Material Expenses Increase in RM cost was mainly due to the impact of DMF, which will be 3% of limestone royalty w.e.f. December 1, 215 Employee Expenses Power and fuel 1,68.2 1,8.6 1, , Energy cost declined due to an increase in pet coke consumption in the fuel mix (74% in Q3FY16 vs 51% in Q3FY15), 18% YoY decline in pet coke cost and increase in share of thermal power plant & WHRMS (57 MW) Freight 1,398. 1, , , Logistic cost increased due to a hike in rail freight (2.7% hike from April 1 215) Others , , EBITDA 1, EBITDA Margin (%) bps bps The EBITDA margin improved due to lower energy cost The increase in depreciation expenses was due to a change in useful life of ancillary Depreciation asset Interest PBT Total Tax PAT PAT declined mainly on account of a fall in interest expenses Key Metrics Volume (MT) The volume growth was mainly led by capacity expansion Realisation ( ) 4,955 4,953 5, , Prices during the quarter declined due to pricing pressure across regions EBITDA per Tonne ( ) EBITDA/tonne improved mainly due to lower energy cost Change in estimates FY16E FY17E ( Crore) Old New % Change Old New % Change Comments Revenue 23, , , , EBITDA 4,3.6 4, , , We expect EBITDA to improve led by a decline in energy and freight cost EBITDA Margin (%) bps bps PAT 2,12.5 2, , , We expect PAT to improve led by lower interest expenses EPS ( ) Assumptions Current Earlier FY13 FY14 FY15 FY16E FY17E FY15 FY16E FY17E Comments Volume (MT) We expect volumes to increase mainly led by capacity expansion Realisation ( ) 4,8 4,713 4,963 4,996 5,15 4,963. 4,978 5,76 We expect realisation to remain healthy mainly due to better realisation in south EBITDA per Tonne ( ) 1, , We expect EBITDA/tonne to remain healthy on acount of improved realisation and lower power cost ICICI Securities Ltd Retail Equity Research Page 2

3 Company Analysis Largest pan-india player in cement Industry Regional presence South 24% East 15% West 32% North 29% UltraTech Cement is the largest player in capacity terms (~64.7 MT) with a market share of over ~18% in India. The company has consistently remained ahead of its peers in terms of capacity expansion with a CAGR of 23% vs. peer s CAGR of 13% in the past five years. In Q2FY16, UltraTech commissioned 1.6 MT grinding unit at Jhajjar, Haryana and 1.6 MT grinding unit at Dankuni, West Bengal. The management has also indicated that the Bihar and Maharashtra grinding units (1.6 MT each) are expected to be commissioned by March 216. Further, with the ongoing organic, inorganic expansion, total capacity is set to reach ~72.8 MT (consolidated capacity at 75.8 MT) by FY17E while industry capacity is expected to grow at a modest pace in the next three years. This, in turn, is expected to help the company further gain its leadership position, going forward. Demand expected to revive in FY17 UltraTech derives majority of its revenue from northern, western India, at 29%, 32%, respectively. Other than this, 15% of revenue is from eastern India where prices remain strong while 24% of its revenue comes from southern India where prices are improving. On the whole, the sales mix across India is well distributed, indicating lower volatility in blended realisation, going forward. The company has indicated some green shoots of recovery in demand from big-ticket infra projects in north. Further, in the east sustained infra spending in Odisha, Bihar and Chhattisgarh are expected to continue to drive volume growth in Q4FY16 and FY17. In south, the company expects demand from Seemandhra and Telangana to pick up in FY17. Operates at healthy EBITDA/tonne vis-à-vis industry With lower lead distances due to a pan-india presence, captive power plants and higher sales realisations due to a higher trade mix coupled with higher white cement sales realisation, the company generates highest EBITDA/tonne in the industry. It has also been able to reduce its power consumption per tonne gradually through various initiatives. Power requirement of ~8% is met through captive power plants, which helps the company in reducing per tonne cost. Other than this, the company also has increased pet coke consumption, which has helped in reducing power cost. Further, commissioning of various grinding units is expected to reduce freight cost/t. Exhibit 1: Gradual reduction in power requirement Exhibit 2: Higher EBITDA/tonne vis-à-vis peer group FY9 FY1 FY11 FY12 FY13 FY14 EBITDA/tonne ( ) 1,2 1, , Q1FY Q2FY Q3FY Q4FY Q1FY Q2FY Q3FY15 1, Q4FY Q1FY Q2FY16 Kwh/T of cement Ultratech Industry Peer set includes ACC, Ambuja, Shree cement and India cement ICICI Securities Ltd Retail Equity Research Page 3

4 Expect revenue CAGR of 7.9% during FY15-17E We expect revenues to grow at a CAGR of 7.9% YoY over the next two years led by capacity expansion. The company is well on track on the capacity expansion front and will likely remain ahead of its target of 72.8 MT by FY17E (including the Jaiprakash Associate deal). Considering this, we expect volume CAGR of 6.4% during FY15-17E. We expect the blended realisation to increase at a CAGR of 1.4% during FY15-17E. Exhibit 3: Expect expansion led revenue CAGR of 7.9% during FY15-17E Exhibit 4: Capacity addition plans (standalone) 3, 25, 2, 15, 1, 5, FY11 FY12 FY13 FY14 FY15 FY16E FY17E Clinker Grey Cement Opening FY Additions Q1FY Q2FY Q3FY Q4FY Q1FY Q2FY17-4.9* Closing FY Sales ( crore) * Board approval for acquisition of Jaiprakash s MP plant with capacity of 4.9 MT Exhibit 5: Volume to grow at CAGR of 6.4% during FY15-17E Exhibit 6: Realisation to pick up led by higher price realisation in south FY12 FY13 FY14 FY15 FY16E FY17E FY12 FY13 FY14 FY15 FY16E FY17E Sales Volumes Realisation ( /tonne) -LS Growth (%) -RS Exhibit 7: Robust volume growth led by capacity expansion Exhibit 8: Quarterly realisation trend Million Tonne ( ) Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Sales Volume Q1FY16 Q2FY16 Q3FY16 4 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Realisation Q4FY15 Q1FY16 Q2FY16 Q3FY16 ICICI Securities Ltd Retail Equity Research Page 4

5 Margins to improve led by operating efficiency Exhibit 9: Expect EBITDA/tonne of 16 in FY17E In Q3FY16 total cost/tonne declined 5.4% YoY led by lower energy cost. Going forward, cost/tonne is expected to come down further led by commissioning of various grinding units, WHRS, and increased use of pet coke. The full benefit of the recent decline in pet coke prices will be reflected in Q4FY16 and FY17. This, in turn, would help the company in achieving over 2% margins by FY17E. Exhibit 1: Margins to improve led by improvement in realisations FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY11 FY12 FY13 FY14 FY15 FY16E FY17E EBITDA/Tonne EBITDA Margin (%) Exhibit 11: Q3FY16 EBITDA per tonne improves due to lower energy cost Exhibit 12: Pick-up in margins expected, going forward per tonne Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY Q4FY15 Q1FY16 Q2FY16 Q3FY16 (%) Q2FY Q3FY14 Q4FY Q1FY Q2FY Q3FY15 Q4FY Q1FY16 Q2FY16 Q3FY EBITDA Margin Expect net profit CAGR of 17. % during FY15-17E After witnessing a sharp decline in profit in FY15, we expect net margins to improve to 1.5% in FY17E, which is still lower than the average NPM of 13.3% in FY12. Exhibit 13: Profitability trend crore (%) FY11 FY12 FY13 FY14 FY15 FY16E FY17E Net profit - LS Net profit margin -RS ICICI Securities Ltd Retail Equity Research Page 5

6 Outlook and valuation The company is well on track on the capacity expansion front and will likely remain ahead of its target of 72.8 MT by FY17E (including the Jaiprakash Associates deal). Considering this, we expect volume growth at 7.9% CAGR in FY15-17E. We expect blended realisations to increase moderately at 1.4% CAGR over the same period. We estimate blended EBITDA/tonne at 932/tonne in FY16E and 1,6/tonne in FY17E. At the CMP of 2,674, the stock is trading at 17.2x and 14.8x its FY16E and FY17E EV/EBITDA, respectively. We believe the industry s capacity utilisation bottomed at ~69% in FY14. With the government taking measures to boost infrastructure development through steps like long-term fund availability for major infra projects and higher budgetary allocation towards public infrastructure development, we expect robust cement demand growth in FY15-17E to reach 319 MT (i.e. at CAGR of 8.6%, 1.1x of GDP in line with last 1 year s average vs. CAGR of 5.5% and 7.5% in the last five and 1 years, respectively). The company expects government infra spends to gain momentum especially in construction of concrete roads and new capital city creation in Andhra Pradesh. UltraTech is well positioned to reap the benefit of a recovery in demand and generate healthy free cash flows in future. We assign premium valuations multiple to UltraTech vs. its peer companies due to its ability to generate higher margins and healthy cash flows. Hence, we continue to maintain our positive view on the stock with a BUY recommendation with a target price to 3,6/share (i.e. at 2.x FY17E EV/EBITDA and EV/tonne of $225/tonne). Exhibit 14: Key assumptions per tonne FY13 FY14 FY15 FY16E FY17E Sales Volume* Net Realisation* Total Expenditure Raw material Power & Fuel Freight Employees Others EBITDA per Tonne Source: ICICIdirect.com Research; * Blended (grey + white + clinker) ICICI Securities Ltd Retail Equity Research Page 6

7 Exhibit 15: One year forward EV/EBITDA ( Crore) Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 EV 2.5x 18.5x 16.5x 14.5x 1.5x Exhibit 16: One year forward EV/Tonne 2 15 Million $ 1 5 Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 EV $2 $17 $15 $132 $9 Exhibit 17: Valuation Sales Growth EPS Growth PE EV/Tonne EV/EBITDA RoNW RoCE ( cr) (%) ( ) (%) (x) ($) (x) (%) (%) FY FY FY FY16E FY17E ICICI Securities Ltd Retail Equity Research Page 7

8 Company snapshot 4,5 4, 3,5 Target price: 36 3, 2,5 2, 1,5 1, 5 Oct-9 Jan-1 Apr-1 Jul-1 Oct-1 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Source: Bloomberg, Company, ICICIdirect.com Research Key events Date Event Mar-11 The company's wholly-owned subsidiary, UltraTech Cement Middle East Investments Ltd completes acquisition of ETA Star Cement (ETA) and acquires management control of ETA's operations in the UAE, Bahrain and Bangladesh. The company's capacity stands augmented to 52 MTPA Jun-12 CCI publishes an order against several cement manufacturers including ACC Ltd and imposes a penalty of.5 times of the profit for the year 29-1 and For UltraTech, the amount works out to crore Jul-12 Announces that the company has signed an agreement with the shareholders of Gotan Lime Stone Khanij Udyog Pvt Ltd (GKUPL), Rajasthan to acquire 1% equity shares of GKUPL. With this acquisition, GKUPL becomes a wholly-owned subsidiary of the company Sep-13 Announces that the company will acquire 4.8 MT of Gujarat Cement plant of Jaypee Cement. Other than this, ~ 1 MTPA capacity will be commissioned by FY15. Total cement capacity is expected to reach ~7 MTPA Jun-14 Company starts including Jaypee Cement operations in quarterly result from Q1FY15 Sep-14 Commissions 1.4 MT cement mill at Karnataka and 25 MW power plant at AP Dec-14 Board approves acquisition of cement business of Jaiprakash Associates in MP with capacity of 4.9 MT Aug-15 Commissions a bulk terminal with a capacity of 2 MT in Pune, Maharashtra. Sep-15 Commissions a cement grinding unit with a capacity of 1.6 MT at Jhajjar, Haryana. Sep-15 Commissions a cement grinding unit with a capacity of 1.6 MT at Dankuni, West Bengal. Dec-15 Compat sets aside the Competition Commission of India (CCI) order of alleged cartelisation Top 1 Shareholders Rank Name Last filing date % O/S Position (m) Change (m) 1 Aberdeen Asset Management (Asia) Ltd. 3-Jun Life Insurance Corporation of India 3-Sep (.1) 3 Aberdeen Asset Managers Ltd. 3-Nov OppenheimerFunds, Inc. 3-Sep UTI Asset Management Co. Ltd. 3-Nov The Vanguard Group, Inc. 3-Nov Franklin Advisers, Inc. 3-Sep Franklin Templeton Asset Management (India) Pvt. Ltd. 3-Nov DSP BlackRock Investment Managers Pvt. Ltd. 3-Nov APG Asset Management 3-Jun (.1) Source: Reuters, ICICIdirect.com Research Recent Activity Shareholding Pattern (in %) Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Promoter FII DII Others Buys Sells Investor Name Value Shares Investor Name Value Shares William Blair Investment Management, LLC Aditya Birla Group SBI Funds Management Pvt. Ltd William Blair & Company, L.L.C Axiom International Investors LLC T. Rowe Price Hong Kong Limited Kotak Mahindra Asset Management Company Ltd Life Insurance Corporation of India ICICI Prudential Asset Management Co. Ltd Sydinvest Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 8

9 Financial summary Profit and loss statement Crore (Year-end March) FY14 FY15 FY16E FY17E Total operating Income 2, , , ,376.7 Growth (%) Raw material cost Power & Fuel cost Freight cost Employees cost Others Total Operating Exp. 16, , , ,178.6 EBITDA 3,616. 3, ,51.1 5,198.1 Growth (%) Depreciation 1,52.3 1, , ,32.6 Interest Other Income PBT 2, , ,231. 3,991.4 Total Tax PAT 2, ,14.7 2, ,756.7 Growth (%) Adjusted EPS ( ) Cash flow statement Crore (Year-end March) FY14 FY15 FY16E FY17E Profit after Tax 2, ,14.7 2, ,756.7 Add: Depreciation 1,52.3 1, , ,32.6 (Inc)/dec in Current Assets ,711.3 Inc/(dec) in CL and Provisions , ,975.1 CF from operating activities 1, , , ,341.2 (Inc)/dec in Investments , (Inc)/dec in Fixed Assets -2, ,24.8-3,. -2,5. Others CF from investing activities -2,55.5-4, ,. -2,5. Issue/(Buy back) of Equity Inc/(dec) in loan funds , Dividend paid & dividend tax Inc/(dec) in Sec. premium.... Others CF from financing activities , Net Cash flow Opening Cash Closing Cash Balance sheet Crore (Year-end March) FY14 FY15 FY16E FY17E Liabilities Equity Capital Reserve and Surplus 16, , , ,965.7 Total Shareholders funds 17, ,41.3 2, ,24.1 Total Debt 4, , , ,838.2 Deferred Tax Liability 2, ,792. 2,792. 2,792. Minority Interest / Others.... Total Liabilities 24, , , ,87.3 Assets Gross Block 25, , , ,146.5 Less: Acc Depreciation 9, , , ,148.4 Net Block 15,875. 2, , ,998.2 Capital WIP 2,38.4 2,38.4 2, ,95. Total Fixed Assets 17, , , ,948.2 Investments 5, ,28.8 5,28.8 5,28.8 Inventory 2, , , ,234.8 Debtors 1,281. 1,23.2 1,71.6 1,469. Loans and Advances 2,56.7 2,8.5 2,33.8 4,296.6 Other Current Assets Cash Total Current Assets 6, , ,46.9 9,746.7 Creditors 4, , , ,426.7 Provisions ,33. 1, ,66.7 Total Current Liabilities 5, ,52.1 6,58.3 8,33.4 Net Current Assets ,713.3 Others Assets.... Application of Funds 24, , , ,87.2 Key ratios (Year-end March) FY14 FY15 FY16E FY17E Per share data ( ) EPS Cash EPS BV DPS Cash Per Share Operating Ratios (%) EBITDA Margin PBT / Total Operating income PAT Margin Inventory days Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt/EBITDA Debt / Equity Current Ratio Quick Ratio ICICI Securities Ltd Retail Equity Research Page 9

10 ICICIdirect.com coverage universe (Cement) CMP M Cap EPS ( ) EV/EBITDA (x) EV/Tonne ($) RoCE (%) RoE (%) Company ( ) TP( ) Rating ( Cr) FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E ACC* Hold 22, Ambuja Cement* Hold 29, UltraTech Cem Buy 73, Shree Cement ,5 Buy 33, Heidelberg Cem Hold 1, India Cement 82 9 Hold 2, JK Cement Hold 3, JK Lakshmi Cem Hold 3, Mangalam Cem Hold SFCL Buy 2, *CY14, CY15E, CY16E ; ^June year end ICICI Securities Ltd Retail Equity Research Page 1

11 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/2% for large caps/midcaps, respectively, with high conviction; Buy: >1%/15% for large caps/midcaps, respectively; Hold: Up to +/-1%; Sell: -1% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 4 93 research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 11

12 ANALYST CERTIFICATION We /I, Rashesh Shah, CA, and Devang Bhatt, PGDBM Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: ICICI Securities Limited (ICICI Securities) is a SEBI registered Research Analyst having registration no. INH99.ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. 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