ULTRATECH CEMENT Improved demand outlook

Transcription

1 RESULT UPDATE ULTRATECH CEMENT Improved demand outlook India Equity Research Cement UltraTech Cement s (UTCL) Q1FY15 EBIDTA of INR10.5bn (~5% below estimates) was down ~2% YoY despite robust volume growth of ~16% YoY owing to higher-than-estimated costs (mainly energy and other expenditure). Blended EBITDA/t of INR888 stood 15% lower YoY (INR944 our estimate). However, taking cue from the strong volume growth in Q1FY15 and improved demand visibility, we are revising up our volume estimates by ~4%/7% for FY15/FY16 leading to 11%/26% upward revision in our EBITDA estimates, respectively. We are also revising up our EV/EBITDA valuation multiple from 9x to 11x for FY16E factoring in ~30% CAGR in EBITDA over FY14-16E, improved industry demand outlook (due to focus on infrastructure development by the new government) and chances of further improvement in industry capacity utilisation in FY17, given limited capacity additions. Ergo, we upgrade UTCL to HOLD with a revised target price of INR2,613 (INR1,596 earlier). High costs offset volume growth Despite robust volume growth (blended volumes up 16% and domestic grey cement sales up 14% YoY), EBITDA ended ~2% lower YoY impacted by high costs. Energy cost/t rose 6% QoQ, while other expenditure moved up 20% YoY. However, due to high other income (up 29% YoY), PAT at INR6.25bn was broadly in line (down 7% YoY). Base turns favourable in Q2 and Q3 of FY15 With prevailing all-india average cement prices higher than Q1 (by ~4%), expectation of continued robust volume growth and low base of last year, we expect UTCL to post strong earnings growth in Q2 and Q3 of FY15 aiding earnings upgrade. Outlook and valuations: Improved outlook; upgrade to HOLD With the new government s focus on infrastructure development, demand visibility of industry has improved. Also, given limited capacity additions, industry utilisations and hence EBITDA/t of companies could see further improvement in FY17. Factoring in the same, we now value UTCL at 11x FY16E EV/EBITDA (versus 9x earlier) to arrive at a target price of INR2,613 (INR1,596 earlier). We upgrade UTCL to HOLD/Sector Performer from Reduce/Sector Under performer earlier. The stock currently trades at 13x FY15 and 10x FY16E EV/EBITDA. Financials Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. (INR mn) Year to March Q1FY15 Q1FY14 % change Q4FY14 % change FY14 FY15E FY16E Net revenue 56,921 49, ,599 (4.5) 202, , ,616 EBITDA 10,505 10,718 (2.0) 12,710 (17.4) 38,179 52,436 66,042 Net profit 6,256 6,726 (7.0) 8,380 (25.3) 21,445 28,902 38,294 Dil. EPS (INR) (7.1) 30.6 (25.4) Dil. P/E (x) EV/EBITDA (x) ROAE (%) EDELWEISS 4D RATINGS Absolute Rating Rating Relative to Sector HOLD Edelweiss Securities Limited Underperformer Risk Rating Relative to Sector Medium Sector Relative to Market Equalweight MARKET DATA (R: ULTC.BO, B: UTCEM IN) CMP : INR 2,523 Target Price : INR 2, week range (INR) : 2,872 / 1,402 Share in issue (mn) : M cap (INR bn/usd mn) : 692/ 11,482 Avg. Daily Vol.BSE/NSE( 000) : SHARE HOLDING PATTERN (%) Current Q4FY14 Q3FY14 Promoters * MF's, FI's & BK s FII's Others * Promoters pledged shares (% of share in issue) PRICE PERFORMANCE (%) Stock Nifty : NIL EW Construction Material Index 1 month months months Navin Sahadeo navin.sahadeo@edelweissfin.com Prasad Baji prasad.baji@edelweissfin.com July 21, 2014

2 Cement JP Associate s Gujarat assets acquisition completed in Q1FY15 UTCL completed acquisition of the 4.8mtpa of Gujarat assets of JP Associates on June 12, However, contribution of the acquired assets was marginal and hence can be ignored in Q1FY15. Significant contribution will flow from H2FY15. Pending detailed break up of balance sheet and actual profitability of the acquired entity, we haven t yet factored the merger in our earnings estimates. We maintain our earlier view that the acquisition can be earnings dilutive to the extent of ~6% for UTCL (on annualised basis). We, however, have factored the acquisition in our target price working. Low depreciation, high other income saves the day The company has revised the depreciation rate on certain fixed assets as per the useful life specified in the Companies Act, Accordingly, depreciation for the quarter came in lower by INR350mn. Other income rose 29% YoY following maturity of certain investments. As a result, PAT at INR6.25bn stood largely in line with our estimates (down 7% YoY) Industry update: Improved volume outlook With the new government s focus on infrastructure development, demand visibility of industry has improved. Ergo, we revise upwards our industry demand growth estimates from 6%/7% for FY15/FY16 assumed earlier to 7%/9%, respectively. Accordingly, industry utilisations are slated to improve from 74% in FY15E to 76% in FY16E. If the demand momentum sustains and grows at 10% in FY17, given low capacity addition, industry utilisation could further improve to 81% in FY17, aiding further margins improvement for the industry. Table 1: Industry Demand- Supply matrix All India-(mtpa) FY13 FY14 FY15E FY16E Installed capacity at the year end- exit capacities Non-operative Capacities (a) Effective Capacity (b) Operative Effective capacity ( c) = (b)-(a) Consumption - domestic (d) % change YoY 5.1% 2.5% 7.0% 9.0% Cement + clinker exports (e) Total demand (f) = (d) + (e) % change YoY 5.0% 2.5% 6.9% 8.9% Capacity utilisation (f)/( c ) 77% 75% 74% 76% Capex update Source: Edelweiss research During Q1FY15, company commissioned a 25MW captive power plant at Malkhed, Karnataka and 6.5MW of waste heat recovery system at Awarpur, Maharashtra, taking the total installed power capacity of the company to 70-9MW (~80% of its requirement). Another 1.45mtpa grinding unit at Malkhed and two units of 1.6mtpa each in east region are scheduled to get commissioned in phases during FY15. The 2.9mtpa expansion in Rajasthan too remains on track to get commissioned by end of FY15, post which company s total installed capacity will increase to ~70mtpa. 2 Edelweiss Securities Limited

3 UltraTech Cement Table 2: Blended EBITDA per tonne down 9% YoY (INR/tonne) Q1FY15 Q1FY14 % change Q4FY14 % change Realisation 4,812 4,873 (1.3) 4,822 (0.2) Raw material (2.4) 788 (5.3) Power 1, Freight 1,124 1, , Staff (4.9) Others Cost 3,924 3, , EBITDA 888 1,049 (15.3) 1,028 (13.6) Source: Edelweiss research Chart 1: Volume up 9% on YoY basis ,300 1,160 (mn tonnes) , (INR mn) Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 EBITDA/t Volume Source: Edelweiss research Table 3: Valuation Particulars FY16E Assumed EV/EBITDA multiple (x)(a) 11.0 EBITDA of UltraTech (B) 67,681 EBITDA of JPA Gujarat ( C) 2,880 Total EBITDA (D) = (B) + ( C) 70,561 Enterprise Value (E) = (A) x (D) 776,168 Less: FY15E net debt of UltraTtech (F) 21,042 Less: Assumed debt of JPA Gujarat (G) 36,650 Mcap (H) = (E) -(F)-(G) 718,476 Shares o/s post JPA Gujarat deal (mn) (I) 275 Value per share (INR) (H)/(I) 2,613 Potential downside (%) 3.6 Source: Edelweiss research 3 Edelweiss Securities Limited

4 Cement Financial snapshot (INR mn) Year to March Q1FY15 Q1FY14 % change Q4FY14 % change FY14 FY15E FY16E Total vol (Cement + clinker + white cement) (4.3) Realisation (inr/tonne) 4,812 4,873 (1.3) 4,822 (0.2) 4,827 5,154 5,434 Total operating income 56,921 49, ,599 (4.5) 202, , ,616 Raw material costs 8,818 7, ,734 (9.4) 33,273 35,558 41,015 Power and fuel 12,076 9, , ,354 48,550 55,981 Freight outward 13,300 11, ,655 (2.6) 45,808 53,470 61,654 Staff costs 2,758 2, , ,146 11,504 12,885 Other expenses 9,464 7, , ,038 38,597 43,039 Total expenditure 46,416 39, ,888 (1.0) 164, , ,574 EBITDA 10,505 10,718 (2.0) 12,710 (17.4) 38,179 52,436 66,042 Depreciation 2,645 2, ,785 (5.0) 10,523 10,975 12,737 Other income 2,131 1, ,290 3,467 4,270 Interest 1, ,192 3,640 3,640 Profit before tax 8,989 9,192 (2.2) 9,764 (7.9) 27,755 41,289 53,936 Tax 2,733 2, , ,310 12,387 15,641 Core profit 6,256 6,726 (7.0) 8,380 (25.3) 21,445 28,902 38,294 Net profit ,445 28,902 38,294 Equity capital (FV INR 10) 2,744 2,741 2,741 2,742 2,742 2,742 No. of shares (mn) Diluted EPS (INR) (7.1) 30.6 (25.4) As % of net revenues Raw material Employee cost Power & fuel Freight outward (% of revenue) Other expenses EBITDA Reported net profit Change in Estimates FY15E FY16E New Old %change New Old %change Comments Net Revenue 240, , , , Factoring the EBITDA 52,436 47, ,042 52, Improved demand EBITDA Margin outlook we revise Core profit 28,902 23, ,294 27, upwards our volume PAT Margin estimates by 4%/7% for Capex 35,000 36,000 (2.8) 20,000 35,000 (42.9) FY15/FY16 respectively 4 Edelweiss Securities Limited

5 Company Description UltraTech Cement UTCL, post the merger with Samruddhi Cement (demerged cement arm of Grasim Industries), has a combined cement capacity of 57 mtpa (including ETA Star), 500 MW thermal captive power plants (that meets ~80% of requirement) with pan-india presence aggregating to market share of ~19%. Grasim, the flagship company of the AV Birla Group, is a majority shareholder in UTCL with 60.3% ownership. Post the completion of all its expansion projects and also the completion of the acquisition of 4.8mtpa Gujarat Cement Unit of Jaypee Cement, the capacity of the company will rise to ~70mtpa. Investment Theme We maintain our cautious view on the sector given that the capacity utilisation of the industry is likely to remain subdued at ~74% in each of FY15/FY16 respectively. Utilisations in north are likely to dip to ~77% in FY15/FY16 (versus 82% estimated for FY14) while east region is estimated to turn into a surplus region which will keep a check on price hikes in these regions. Key Risks Sharp increase in cement demand/prices may lead to earnings upgrade. Sharp reduction in input cost may lead to earnings upgrade. 5 Edelweiss Securities Limited

6 Cement Financial Statements Key Assumptions Year to March FY13 FY14E FY15E FY16E Macro GDP(Y-o-Y %) Inflation (Avg) Repo rate (exit rate) USD/INR (Avg) Sector All India cement demand (mn tonnes) Demand growth (%) Industry capacity utilisation (%) All India average price (INR/50 kg bag) Company EBITDA/ Tonne (INR) 1, ,125 1,279 Installed capacity (mtpa) as at the end of CY Capacity Utilisation (%) Cement sales volumes (mn tonnes) Cement realisations (INR/tonne) 4,892 4,827 5,154 5,434 Raw material cost per tonne Power & fuel cost per tonne 1, ,042 1,084 Freight cost per tonne 1,024 1,090 1,148 1,194 Other expenses per tonne Total expenses per tonne 3,758 3,918 4,028 4,155 Effective tax rate (%) Debtor days Inventory days Payable days Income statement (INR mn) Total volume (mn tonnes) Income from operations 201, , , ,616 Materials costs 28,647 33,273 35,558 41,015 Stores and tools 11, Power and fuel 42,989 41,354 48,550 55,981 Freight 42,240 45,808 53,470 61,654 Employee costs 9,684 10,146 11,504 12,885 Total SG&A expenses 11, Factory & administrative 7,701 34,038 38,597 43,039 Total operating expenses 154, , , ,574 EBITDA 46,755 38,179 52,436 66,042 Depreciation and amortisation 9,454 10,523 10,975 12,737 EBIT 37,301 27,656 41,461 53,305 Other income 3,050 3,290 3,467 4,270 Interest expenses 2,097 3,192 3,640 3,640 Profit before tax 38,254 27,755 41,289 53,936 Provision for tax 11,738 6,310 12,387 15,641 Net profit 26,516 21,445 28,902 38,294 Profit After Tax 26,554 21,445 28,902 38,294 Profit after minority interest 26,554 21,445 28,902 38,294 Basic EPS (INR) Shares outstanding (mn) Diluted EPS (INR) CEPS (INR) Dividend per share (INR) Dividend payout (%) Common size metrics Operating expenses Materials costs Power and fuel Freight Depreciation Interest expenditure EBITDA margins Net profit margins Growth ratios (%) Revenues EBITDA 12.7 (18.3) PBT 12.7 (27.4) Net profit 8.3 (19.4) EPS 8.8 (19.1) Edelweiss Securities Limited

7 UltraTech Cement Balance sheet (INR mn) As on 31st March FY13 FY14 FY15E FY16E Equity capital 2,742 2,742 2,742 2,742 Reserves & surplus 149, , , ,655 Shareholders funds 152, , , ,398 Short term debt 15,146 7,057 7,057 7,057 Long term debt 38,957 44,959 44,959 44,959 Borrowings 54,104 52,016 52,016 52,016 Deferred tax liability 19,059 22,958 22,958 22,958 Sources of funds 225, , , ,372 Tangible assets 130, , , ,813 Intangible assets CWIP (incl. intangible) 42,928 30,001 25,000 15,000 Non current investments 19,818 16,623 16,623 16,623 Current Investments 31,270 37,293 34,793 34,793 Cash and equivalents 1,427 2,775 6,423 32,694 Inventories 23,505 23,684 25,007 26,440 Sundry debtors 10,172 12,810 13,869 15,751 Loans and advances 13,689 17,193 17,193 17,193 Other current assets Total current assets (ex cash) 78,692 91,133 91,015 94,330 Trade payable 21,934 24,242 25,782 27,223 Others current liabilities 26,642 27,348 27,348 27,348 Total current liabilities & 48,577 51,591 53,130 54,571 Net current assets (ex cash) 30,115 39,543 37,885 39,759 Uses of funds 225, , , ,372 Book value per share (INR) Free cash flow (INR mn) Net profit 26,554 21,445 28,902 38,294 Depreciation 9,454 10,523 10,975 12,737 Others 3,606 4, Gross cash flow 39,614 36,857 39,878 51,032 Less: Changes in WC 3,887 10, ,874 Operating cash flow 35,727 26,337 39,035 49,158 Less: Capex 32,676 23,380 35,000 20,000 Free cash flow 3,051 2,957 4,035 29,158 Cash flow metrics Operating cash flow 35,727 26,337 39,035 49,158 Investing cash flow (43,025) (26,210) (32,501) (20,001) Financing cash flow 6,829 1,221 (2,886) (2,886) Net cash flow (469) 1,348 3,648 26,271 Capex (32,676) (23,380) (35,000) (20,000) Dividends paid (2,183) (2,886) (2,886) (2,886) Profitability & efficiency ratios ROAE (%) ROACE (%) Inventory day Debtors days Payable days Cash conversion cycle (days) Current ratio Debt/EBITDA Debt/Equity Adjusted debt/equity Interest coverage Operating ratios Total asset turnover Fixed asset turnover Equity turnover Valuation parameters Diluted EPS (INR) Y-o-Y growth (%) 8.8 (19.1) Diluted PE (x) Price/BV (x) EV/tonne (USD/tonne) EV/Sales (x) EV/EBITDA (x) EV/EBITDA (x)+1 yr forward Dividend yield (%) Peer comparison valuation Market cap Diluted PE (X) EV/EBITDA (X) ROAE (%) Name (USD mn) FY15E FY16E FY15E FY16E FY15E FY16E UltraTech Cement 11, ACC 4, Ambuja Cement Ltd 5, India Cements JK Cement Shree Cements 4, Median AVERAGE Source: Edelweiss research 7 Edelweiss Securities Limited

8 Cement Additional Data Directors Data Kumar Mangalam Birla Chairman Mrs. Rajashree Birla Director R. C. Bhargava Independent Director M. Damodaran Independent Director G. M. Dave Independent Director Adesh Gupta Director Nirmalya Kumar Independent Director S. B. Mathur Independent Director V. T. Moorthy Independent Director S. Rajgopal Independent Director D. D. Rathi Director O. P. Puranmalka Whole-time Director Auditors - Deloitte Haskins & Sells, G. P. Kapadia & Co. *as per last annual report Holding - Top 10 Perc. Holding Perc. Holding Aberdeen Asset Managers Ltd OppenheimerFunds, Inc Life Insurance Corp. of India 2.88 Aberdeen Asset Management (Asia) Ltd Capital Research & Management Co. (World Investors) 0.80 UTI Asset Management Co. Ltd The Vanguard Group, Inc APG Asset Management NV 0.58 First State Investment Management (UK) Ltd SBI Life Insurance Co. Ltd *as per last available data Bulk Deals Data Acquired / Seller B/S Qty Traded Price No Data Available *in last one year Insider Trades Reporting Data Acquired / Seller B/S Qty Traded 15 May 2014 Turquoise Investments and Finance Private Limited Sell Apr 2014 Trapti Trading And Investment Private Limited Sell Apr 2014 Trapti Trading And Investment Private Limited Sell Apr 2014 Trapti Trading And Investment Private Limited Sell *in last one year 8 Edelweiss Securities Limited

9 RATING & INTERPRETATION Company Absolute reco Relative reco Relative risk Company Absolute reco Relative reco Relative Risk ACC REDUCE SP M Ambuja Cement Ltd REDUCE SU M Grasim Industries HOLD SO M India Cements REDUCE SU H JK Cement HOLD SP M Shree Cements BUY SO M UltraTech Cement REDUCE SU M ABSOLUTE RATING Ratings Expected absolute returns over 12 months Buy More than 15% Hold Between 15% and - 5% Reduce Less than -5% RELATIVE RETURNS RATING Ratings Sector Outperformer (SO) Sector Performer (SP) Criteria Stock return > 1.25 x Sector return Stock return > 0.75 x Sector return Stock return < 1.25 x Sector return Sector Underperformer (SU) Stock return < 0.75 x Sector return Sector return is market cap weighted average return for the coverage universe within the sector RELATIVE RISK RATING Ratings Low (L) Medium (M) High (H) Criteria Bottom 1/3rd percentile in the sector Middle 1/3rd percentile in the sector Top 1/3rd percentile in the sector Risk ratings are based on Edelweiss risk model SECTOR RATING Ratings Overweight (OW) Equalweight (EW) Criteria Sector return > 1.25 x Nifty return Sector return > 0.75 x Nifty return Sector return < 1.25 x Nifty return Underweight (UW) Sector return < 0.75 x Nifty return 9 Edelweiss Securities Limited

10 Cement Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai Board: (91-22) , Vikas Khemani Head Institutional Equities Nischal Maheshwari Co-Head Institutional Equities & Head Research Nirav Sheth Head Sales Coverage group(s) of stocks by primary analyst(s): Cement ACC, Ambuja Cement Ltd, Grasim Industries, India Cements, JK Cement, Shree Cements, UltraTech Cement Recent Research Date Company Title Price (INR) Recos 26-May-14 India Cements EBITDA above estimates; regional concerns persist; Result Update 19-May-14 JK Cement Realisations spring a positive surprise; Result Update 12-May-14 Cement Southern region - Not out of the woods; Sector Update 99 Reduce 300 Hold Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Buy Hold Reduce Total Rating Interpretation Rating Expected to Rating Distribution* * 1 stocks under review > 50bn Between 10bn and 50 bn < 10bn Market Cap (INR) Buy Hold Reduce appreciate more than 15% over a 12-month period appreciate up to 15% over a 12-month period depreciate more than 5% over a 12-month period 10 Edelweiss Securities Limited

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