Ultratech Cement ACCUMULATE. Performance Highlights. Outlook and Valuation: 3QFY2010 Result Update I Cement

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1 3QFY2010 Result Update I Cement January 18, 2010 Ultratech Cement Performance Highlights ACCUMULATE CMP Target Price Rs1,002 Rs1,090 Top-line flat at Rs1,652cr: Ultratech Cement (ULTC) posted a marginal Top-line growth of 1.3% yoy to Rs1,652cr (Rs1,631cr) for 3QFY2010, which was in-line with our estimate. The Top-line was driven primarily by higher volumes from the cement division. Cement sales volumes grew 10% yoy to 4.40mn tonnes during the quarter, from 3.98mn tonnes in 3QFY2009. The healthy growth in Volumes was offset by a decline in prices, which resulted in a muted Top-line growth. The stock trades at a P/E of 9.6x, at an EV/EBITDA of 5x and at an EV/tonne of US $95/tonne, according to its FY2012E estimates. Given the recent run-up in the stock price, we are revising our recommendation from Buy to Accumulate. Sluggishness in Southern Region demand acts as a dampener: The company s Top-line and Margin were adversely impacted by the slowdown in the demand from the southern region, which constitutes around 30% of its total sales. The fall in demand coincided with the commissioning of new capacities in the southern region, thereby resulting in the price fall. Further, this quarter also witnessed a drop in the clinker export realisation, on account of the reduced offtake from the Middle-East, due to a decline in construction activities. On the Operating front, the company reported a decrease of 320bp yoy in its EBIDTA Margin to 23.2% (26.4%). During the quarter, the company s Net Profit de-grew by 18% yoy to Rs 196cr (Rs238cr). Outlook and Valuation: The stock trades at a P/E of 9.6x, at an EV/EBITDA of 5x and at an EV/tonne of US $95/tonne, according to its FY2012E estimates. On the valuation front, we have valued Ultratech at an average of a Target EV/EBITDA of 6.5x and an EV/tonne of US $105/tonne, which is at a premium to the replacement cost, considering the ROCE over 2 years, to arrive at a revised fair value of Rs1,090 (Rs1,096 earlier). Given the recent run-up in the stock price, we are revising our recommendation from Buy to Accumulate. Investment Period 15 Months Stock Info Sector Cement Market Cap (Rs cr) 12,474 Beta WK High / Low 1059/ 343 Avg. Daily Volume 42,545 Face Value (Rs) 10 BSE Sensex 17,641 Nifty 5,275 Reuters Code ULTC.BO Bloomberg Code UTCEM@IN Shareholding Pattern (%) Promoters 54.8 MF/Banks/Indian FIs 24.4 FII/NRIs/OCBs 5.5 Indian Public 15.3 Abs. (%) 3m 1yr 3yr Sensex ULTC (12.6) Key Financials Y/E March (Rs cr) FY2009 FY2010E FY2011E FY2012E Net Sales 6,383 7,117 7,334 8,587 % chg Adj. Net Profit 977 1, ,295 % chg (3.0) 16.3 (12.8) 30.7 OPM (%) EPS (Rs) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x) Rupesh Sankhe Tel: Ext: rupeshd.sankhe@angeltrade.com V Srinivasan Tel: Ext: v.srinivasan@angeltrade.com Please refer to important disclosures at the end of this report Sebi Registration No: INB

2 Operational Highlights The company s per tonne cement realisation was down by 8.4% yoy during the quarter, on account of a slowdown in demand from the southern region (due to political uncertainty in the state of Andhra Pradesh). Further, the cement price in Andhra Pradesh bottomed at around Rs140/bag, as against the average price of Rs200/bag a year earlier. Moreover, the commissioning of new capacities in the region also resulted in an increased supply, which was not matched by adequate demand. However, on a positive note, the company s per tonne power and fuel cost was down 39.5% on account of the setting-up of new captive power plants. The fall in the realisation resulted in a decline in Operating Profit per tonne by 19.5%. Exhibit 1: Per tonne analysis (Rs) 3QFY2009 2QFY2010 3QFY2010 yoy chg (%) qoq chg (%) Realisation/tonne 4,098 3,704 3,754 (8.4) 1.4 Raw Material Cost/tonne Power & Fuel Cost /tonne 1, (39.5) 6.5 Freight & Forwarding Cost/tonne (1.0) (3.2) Operating Profit/tonne 1, , (19.5) (22.8) Depreciation/tonne (3.7) Net Profit/tonne (25.6) (26.1) Corporate Restructuring During the quarter, the board of Ultratech has approved the merger of Samruddhi cement (Samruddhi) with itself. Samruddhi is the 65% subsidiary of Grasim Industries (Grasim). Grasim had transferred its cement business to Samruddhi in October 2009, while the shareholders of Grasim directly hold the remaining 35%. According to the merger plan, the shareholders of Samruddhi will get four shares of Ultratech of a face value of Rs10 each for every seven shares of a face value of Rs5 each. Size and Scale The merged entity will be India s largest Cement and RMC company, and among the top ten grey cement companies in the world. The merged company will also be the world s seventh-largest white cement company. After the merger of Samruddhi, Ultratech will become India s largest cement player, with a capacity of 48.8mtpa. The company will also have a pan-indian presence, with a market share of 16% in the North, 20% in the East, 29% in the West and 15% in the South. January 18,

3 Exhibit 2: Assets of the merged company Grey Cement Standalone Samruddhi Combined Capacity (mtpa) No. of Plants - Grey Cement Grinding Units White Cement Capacity (mtpa) No. of Plants 1 1 RMC (Million Cubic Metres) No. of Plants 68 Thermal Power Plants (MW) Bulk Terminals Investments Subsidiaries 80% Equity in Lanka 100% Equity in Harsh Cement Combined Investments Exhibit 3: 3QFY2010 Performance Y/E March (Rs cr) 3QFY10 3QFY09 % chg 9MFY10 9MFY09 % chg Net Sales 1,652 1, ,141 4, Consumption of Raw Material (% of Net Sales) Power and Fuel ,066 1,318 (19.1) (% of Net Sales) Staff Costs (2.0) (% of Net Sales) Freight & Forwarding (% of Net Sales) Other expenses (% of Net Sales) Total Expenditure 1,268 1, ,570 3, Operating Profit (10.9) 1,570 1, OPM (%) Interest (27.0) (2.7) Depreciation Other Income Profit before Tax (13.7) 1, Current Tax (3.7) (% of PBT) Profit after Tax (17.8) PAT Margin EPS (Rs) (17.8) January 18,

4 Outlook and Valuation Total cement capacity in India stood at around 219.2mtpa at the end of FY2009, an increase of 21mtpa yoy. Additionally, the capacity is expected to have been augmented by 30mn tonnes in 9MFY2010. We expect these additional capacities to fully ramp-up over the next 3-4 months, which would eventually exert pressure on cement prices. Overall, we expect the industry to add around 76mn tonnes of capacity through FY E. Such huge capacity additions would eventually result in an oversupply situation in the market, while demand is not expected to keep pace with the supply. All the frontline states in the southern region, like Andhra Pradesh, Tamil Nadu and Karnataka, are witnessing low demand or a fall therein, which is a cause for concern. Most of the capacities that are being expanded are in the southern regions; thus, the industry is witnessing aggressive inter-regional stock movement, which pressurises the pricing power and profitability in other regions as well. On account of the huge capacity addition, cement prices declined by 2.7% yoy during 3QFY2010. The cement prices rose in the southern and western regions in December, due to distribution constraints, on the back of a shortage in the availability of rail wagons. Further, the instability in the political scenario in Andhra Pradesh resulted in a rebound in the prices in the state, which bottomed out at close to Rs and also helped in arresting the price fall in other parts of the region. The prices in the northern region were ruling higher in December, on account of the demand arising from the Commonwealth Games. However, the rise in prices is expected to be a short-term trend, as the new capacity addition over the last few months is expected to exert pressure, going ahead. Exhibit 4: Valuation based on EV/EBITDA multiple and Asset Replacement (FY2012E) Target EV/EBITDA (x) 6.5 Target EV/tonne (US $) 105 EV (Rs cr) 30,805 EV (Rs cr) 30,636 Market Cap (Rs cr) 29,971 Market Cap (Rs cr) 29,803 No. of shares*(cr) 27.4 No. of shares* (cr) 27.4 Fair Price (Rs) 1,093 Fair Price (Rs) 1,087 ; Note: *Based on Post merger equity capital On the valuation front, we have valued Ultratech at an average of a Target EV/EBITDA of 6.5x and an EV/tonne of US $105/tonne, which is at a premium to the replacement cost, considering the ROCE over 2 years, to arrive at a revised fair value of Rs1,090 (Rs1,096 earlier), which is at a discount to the valuations of its peers like ACC (EV of US $115/tonne) and Gujarat Ambuja (EV of US $125/tonne). The likely merger between Samruddhi and UltraTech is expected to be positive for the latter, as it would become the largest cement player in the country. The stock trades at a P/E of 9.6x, at an EV/EBITDA of 5x and at an EV/tonne of US $95/tonne, according to its FY2012E estimates. Given the recent run-up in the stock price, we are revising our recommendation from Buy to Accumulate. January 18,

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