UltraTech Cement (ULTCEM) 2873

Transcription

1 Company Update Rating matrix Rating : Buy Target : 36 Target Period : 9-12 months Potential Upside : 25% What s changed? Target Price EPS FY16E* EPS FY17E* Rating *We have not incorporated Jaypee financials Key financials Unchanged Unchanged Unchanged Unchanged Crore FY14* FY15* FY16E* FY17E* Net Sales EBITDA Net Profit EPS ( ) * Does not include Jaypee financials as the deal will take months to materialise 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 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 In a league of its own... March 1, 216 UltraTech Cement (ULTCEM) 2873 UltraTech Cement (UltraTech) has entered into a binding MoU for acquisition of 22.4 MT cement assets of Jaiprakash Associates (Jaypee). This move will increase its capacity by 33% to 9.7 MT (from the current 68.3 MT), making it the largest cement player in the domestic market (fourth largest player globally) with a market share of over 22%. The assets to be acquired include 22.4 MT cement capacity along with 325 MW captive power plant for 16,97 crore, which works out to US$11/tonne. However, if we consider a US$1-11/tonne valuation for 6 MT plant in south operating at 55% utilisation (due to overcapacity in the region) and 47 crore for 4 MT under construction grinding unit, the valuation for remaining assets works out to US$14-145/tonne, which, we believe is fairly valued and in line with current replacement cost. The transaction is subject to various regulatory approvals and amendments in MMDR regulations resulting in a gestation period of months. The deal will be positive for the company considering synergy benefits, access to newer markets and reasonable valuation. Hence, we remain positive on the company and maintain our BUY recommendation. Acquisition to further strengthen leadership; provide access to new clusters The acquisition of Jaypee will increase UltraTech s market share from 16% to 22%, making it the largest cement player in the domestic market. Jaypee s cement assets are spread across regions viz. 1) central region (11.4 MT), 2) north (4.8 MT), 3) south (6MT). The 12 plant locations of Jaypee complement the existing 4 location of UltraTech. The acquisition is expected to give UltraTech access to newer markets of Satna (11.4 MT) and coastal Andhra Pradesh (5. MT). Post the acquisition, UltraTech s capacity share in central & north is expected to increase from 9% & 14% to 29% & 19%, respectively, making UltraTech the dominant player in these regions. Considering the high entry barriers for organic expansion, the current acquisition of Jaypee (given the substantial capacity, 4 years of limestone reserves and complementary markets) makes it a strategic fit for the company. Long term value accretive In the long term we expect the deal to be value accretive mainly led by improvement in operational performance, logistic synergies, procurement synergy (bulk procurement of raw materials), higher usage of pet coke and more importantly UltraTech s brand advantage. Well positioned to reap benefits of demand recovery; maintain BUY With the proposed acquisition of Jaypee, UltraTech will become the fourth largest cement player globally (in capacity terms). From a long term perspective the deal is expected to be earnings accretive for the company led by synergy benefits. Further, with this deal, UltraTech will have a presence across regions (except NE) enabling it to reap the benefits of a demand recovery led by higher government spends on infra and revival in housing demand. With industry-leading growth (on the back of consistent capacity addition), higher margins and healthy cash flows, we maintain our positive view with a target price of 3,6/share (i.e. at 2.x FY17E EV/EBITDA) and BUY rating on the stock. ICICI Securities Ltd Retail Equity Research

2 Exhibit 1: Plant wise capacity of Jaiprakash Associate Capacity (mt) Particulars Location Plant type Clinker Cement 1 Dalla Integrated Unit JP super (under commissioning) Clinker Tanda Grinding unit 1. 4 Sikanderabad Grinding unit 1. 5 Bara (under commisioning) Grinding unit 4. 6 Bela Integrated Unit Sidhi Integrated Unit Satna cluster Baga Integrated Unit Bagheri Grinding unit 2. 1 Roorkee Grinding unit 1.1 HP cluster Balaji Integrated Unit Shahabad Grinding unit 1.2 South cluster Total Exhibit 2: UltraTech s zonal presence post acquisition Region Pre-acquistion Organic expansion Jaypee's plants Postacquistion As a % of domestic capacity North Satna East West South All India Overseas Total Source: Company, ICICIdirect.com, Research Source: Company, ICICIdirect.com, Research Exhibit 3: Global positioning post proposed acquisition (in mt) Lafarge Holcim 2 Heidelberg Italcementi Cemex Ultratech* CRH, * includes 1.6 MT grinding unit in Bihar to be commissioned in Mar-16 Company to strengthen its presence across major clusters post acquisition The company is expected to gain access to newer markets of Satna and coastal Andhra Pradesh (AP). The Satna cluster has been growing at a CAGR of 7% in the past five years and has low per capita consumption of 14 kg, representing huge potential for growth. The region has eight players with a total capacity of 38 MT and utilisation of 8%. The AP region is poised for growth led by development of new capital city Amravathi and is expected to register ~1% CAGR in the next five years. capacity utilisation is expected to increase from 71% to 85% in the next five years. The acquisition of HP assets is expected to provide synergy benefits in terms of reduced logistic cost led by lower lead distance. Further, high infra spending and increased housing demand is expected to drive cement demand in the region. ICICI Securities Ltd Retail Equity Research Page 2

3 Company Analysis Largest pan-india player in cement Industry UltraTech Cement is the largest player in capacity terms (~68.3 MT) with a market share of over ~16% 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, the ongoing organic, inorganic expansion is expected to help the company cement its leadership position, going forward. Demand expected to revive in FY17 UltraTech derives majority of its revenue across India and is well distributed indicating lower volatility in blended realisation, going forward. The company has indicated some green shoots of recovery in demand from bigticket 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 the 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, helping the company reduce per tonne cost. Other than this, the company has also increased pet coke consumption, helping it to reduce power cost. Further, commissioning of various grinding units is expected to reduce freight cost/tonne. Exhibit 4: Gradual reduction in power requirement Exhibit 5: 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% in FY15-17E We expect revenues to grow at a CAGR of 7.9% YoY over the next two years led by capacity expansion. We expect volume CAGR of 6.4% in FY15-17E. We expect the blended realisation to increase at a CAGR of 1.4% in FY15-17E. Exhibit 6: Volume to grow at CAGR of 6.4% during FY15-17E Exhibit 7: 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 8: Robust volume growth led by capacity expansion Exhibit 9: 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 1: 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 achieve margins over 2% by FY17E. Exhibit 11: 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 12: Q3FY16 EBITDA per tonne improves due to lower energy cost Exhibit 13: 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.% in 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 14: 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 With the proposed acquisition of Jaypee, UltraTech will become the fourth largest cement player globally (in capacity terms). From a long term perspective the deal is expected to be earnings accretive for the company led by synergy benefits. Further, with this deal, UltraTech will have a presence across regions (except NE) enabling it to reap the benefits of a demand recovery led by higher government spends on infra and revival in housing demand. With industry-leading growth (on the back of consistent capacity additions), higher margins and healthy cash flows, we maintain our positive view with a target price of 3,6/share (i.e. at 2.x FY17E EV/EBITDA) and BUY rating on the stock. Exhibit 15: 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) Exhibit 16: 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 6

7 Company snapshot 4,5 4, 3,5 Target price: 36 3, 2,5 2, 1,5 1, 5 Feb-1 May-1 Aug-1 Nov-1 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 Source: Bloomberg, Company, ICICIdirect.com Research Key events Date Event 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 Feb-16 The company signs binding MoU with Jaiprakash Associate to acquire 22.4 MT cement capacity Top 1 Shareholders Rank Name Last filing date % O/S Position (m) Change (m) 1 Aditya Birla Group 31-Dec (.) 2 Aberdeen Asset Management (Asia) Ltd. 3-Jun Life Insurance Corporation of India 31-Dec OppenheimerFunds, Inc. 31-Dec Aberdeen Asset Managers Ltd. 31-Dec (.2) 6 UTI Asset Management Co. Ltd. 31-Dec (.3) 7 The Vanguard Group, Inc. 31-Jan (.) 8 Franklin Advisers, Inc. 3-Sep Franklin Templeton Asset Management (India) Pvt. Ltd. 31-Dec DSP BlackRock Investment Managers Pvt. Ltd. 31-Jan Source: Reuters, ICICIdirect.com Research Recent Activity Shareholding Pattern (in %) Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Promoter FII DII Others Buys Sells Investor Name Value Shares Investor Name Value Shares Life Insurance Corporation of India GMO LLC Driehaus Capital Management, LLC William Blair Investment Management, LLC Baillie Gifford & Co UTI Asset Management Co. Ltd T. Rowe Price Hong Kong Limited Aberdeen Asset Managers Ltd Kotak Mahindra Asset Management Company Ltd BlackRock Institutional Trust Company, N.A Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 7

8 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 ( ) , * does not include Jaypee financials 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 , * does not include Jaypee financials 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, * does not include Jaypee financials 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 , * does not include Jaypee financials ICICI Securities Ltd Retail Equity Research Page 8

9 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 23, Ambuja Cement* Hold 3, UltraTech Cem Buy 78, Shree Cement Buy 36, Heidelberg Cem Hold 1, India Cement 69 8 Hold 2, JK Cement Hold 3, JK Lakshmi Cem Hold 3, NA 7.3 Mangalam Cem Buy NA 8.8 SFCL Buy 2, *CY14, CY15E, CY16E ; ^June year end ICICI Securities Ltd Retail Equity Research Page 9

10 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 1

11 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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