April 20, 2009 Cement Company Update UltraTech Cement (ULTCEM) Current Price Rs 546 Potential upside 15.4% Target Price Rs 630 Time Frame 12-15 months Powered by savings Historically, UltraTech Cement has been trading at about 30% discount to ACC, despite having better return ratios, better margins and lesser earnings sensitivity to cement price decline. This was primarily on account of its dependence on expensive sources of power. With CPPs (Captive Power Plants) coming onstream, we believe, the valuation gap between ACC and UltraTech to reduce. Also UltraTech, on account of its high dependence on imported coal than ACC, will have a higher savings in fuel cost. We reiterate coverage on Ultra tech with PERFORMER rating with price target of Rs 630. Power & fuel cost to decline per tonne Imported coal constitutes 43% of UltraTech s fuel requirement. The prices of imported coal have decline by 67.8% from its peak. Apart from this, UltraTech to set up CPPs with total capacity of 225 MW, which are likely to be commissioned in phased manner by H1FY10E. Upon commissioning, 80% pf the power requirement of the company will be met by captive power. In FY08, UltraTech met only 23% of its electricity requirement by coal based CPP, 64% was from grid, 12% through DG set and 1% Waste Heat Recovery Plant. We expect CPPs to generate saving of Rs 167 crore in FY10. Increase in capacity to drive volumes UltraTech has started commercial production of clinker from Andhra Pradesh Cement Works (APCW) and cement from the grinding unit at Ginigera in Karnataka. Upon commissioning of grinding capacity at APCW, the total capacity of the company will increase from 19.5 million tonnes to 23.1 million tonnes by the end of FY09. On account of capacity additions, we expect company s volume to grow at 7.5% CAGR (FY08-FY11). Valuations At the CMP of Rs 546 per share, the stock is trading at 7.2x and 8.0x its FY09E and FY10E earnings, respectively. It is trading at an EV/Tonne of $76.1 and $61.7 of its FY09E and FY10E capacities, respectively. We reiterate coverage on UltraTech with PERFORMER rating with price target of Rs 630 per share. Exhibit 1: Key Financials Net Profit (Rs Cr) 782.3 1007.6 950.3 860.0 782.7 EPS (Rs) 62.8 80.4 75.9 68.7 62.5 % Growth 28.0-5.7-9.5-9.0 P/E (x) 8.7 6.8 7.2 8.0 8.7 P/BV (x) 3.9 2.5 1.9 1.6 1.4 EV/EBIDTA (x) 5.5 4.8 5.1 4.6 4.4 OPM Margin(%) 28.9 31.2 26.2 25.6 22.3 NPM (%) 15.9 18.3 14.8 13.6 11.8 RoNW (%) 55.8 45.2 30.4 21.8 16.7 RoCE (%) 43.0 40.7 28.9 23.4 19.9 Analysts Name Ravi Sodah ravi.sodah@icicidirect.com Vijay Goel vijay.goel@icicidirect.com Sales & EPS trend 6500 5500 4500 3500 2500 FY07 Stock Metrics FY08 Sales Bloomberg Code UTCEM IN Reuters Code ULTC.BO Face value (Rs) 10 Promoters Holding 54.8 Market Cap (Rs cr) 6967 52 week H/L 843/250 Sensex 10947 Average volumes 25450 Comparative return metrics Stock return (%) 3M 6M 12M Ultra Tech 53 52-28 ACC 25 28-23 Ambuja Cements 18 47-25 India Cement 18 35-30 Price Trend 800 700 600 500 400 300 200 PERFORMER Close Price FY09E EPS FY10E FY11E Target Price Apr- Jun- Aug- Oct- Dec- Feb- Apr- 100 80 60 Rs Source: ICICIdirect.com Research ICICIdirect.com Equity Research 82
Company Background UltraTech Cement, erstwhile L&T Cement, is India s second largest cement company after ACC with a capacity of 19.5 million tonnes. Grasim had acquired 50.2% stake in UltraTech Cement in FY04, making it part of the AV Birla Group. The company was barely breaking even the time Grasim acquired it from L&T, however, over the last 4years, it has been transformed to one of the better managed companies in the industry. Ultra Tech is also the largest exporter of cement clinker from India. It has plant in three out of five regions in India Share holding patter (Q3FY09) Shareholder % holding Promoters 54.8 Institutional investors 11.4 Other investors 18.2 General public 15.7 Promoter & Institutional holding trend (%) 60% 54% 54% 54% 55% Exhibit 2: Capacity Breakup (as on Mar 09) 40% 23% 20% 0% 16% 15% 15% 11% Q4 Q1 Q2 Q3 56% Promoter Holding Institutional Holding 21% West East South Source: Company, ICICIdirect.com Research 83
Exhibit 3: Historical Valuations P/BV & Mcap/Sales 8.5 7.5 6.5 5.5 4.5 3.5 2.5 1.5 0.5 FY05 FY06 FY07 FY08 FY09 FY10 FY11 P/BV (LHS) MCap/Sales(LHS) P/CEPS(RHS) EV/EBIDTA(RHS) 20 16 12 8 4 0 EV/EBIDTA & P/CEPS Source: Company, ICICIdirect.com Research Exhibit 4: EV/tonne, RoNW and RoCE EV/tonne 140 120 100 80 60 40 20 0 FY05 FY06 FY07 FY08 FY09 FY10 FY11 EV/Tonne(US$) (LHS)) RoNW(%) (RHS) ROCE (%) (RHS) 60 50 40 30 20 10 0 % Source: Company, ICICIdirect.com Research 84
Profit and Loss Account Net Sales 4910.5 5509.2 6413.9 6308.9 6638.5 % Growth 12.2 16.4-1.6 5.2 Total Expenditure 3492.7 3789.2 4732.1 4690.8 5156.8 EBIDTA 1417.8 1720.1 1681.8 1618.1 1481.7 Other income 61.5 99.9 95.2 96.2 97.1 Depreciation 226.3 237.2 317.4 372.3 399.3 Interest Expenses 86.8 75.7 130.5 122.2 61.4 Extra ordinary items 0.0 0.0 0.0 0.0 0.0 PBT 1166.2 1507.0 1329.1 1219.8 1118.1 Taxation 383.9 499.4 378.8 359.8 335.4 RPAT 782.3 1007.6 950.3 860.0 782.7 EO (net of tax) 0.0 0.0 0.0 0.0 0.0 Adj. PAT 782.3 1007.6 950.3 860.0 782.7 EBIDTA margin (%) 28.9 31.2 26.2 25.6 22.3 NPM (%) 15.9 18.3 14.8 13.6 11.8 Shares O/S (crore) 12.4 12.5 12.5 12.5 12.5 EPS (Rs) 62.8 80.4 75.9 68.7 62.5 Balance Sheet Sources of funds Equity Share Capital 124.5 125.3 125.3 125.3 125.3 Reserves 1639.3 2571.7 3437.5 4205.9 4896.9 Secured Loans 1151.3 982.7 1357.7 882.7 632.7 Unsecured Loans 427.4 757.8 757.8 557.8 457.8 Deferred Tax Liability 560.3 542.4 542.4 542.4 542.4 Total Liabilities 3902.7 4979.8 6220.6 6314.0 6655.1 Application of Funds Net Block 2517.3 2500.5 4933.1 5660.8 5361.5 Capital WIP 697.0 2283.2 990.0 0.0 0.0 Investments 483.5 170.9 170.9 170.9 170.9 Cash 89.6 100.7 253.1 600.0 1257.3 Sundry Debtors 183.5 216.6 252.2 248.1 261.0 Inventories 433.6 609.8 709.9 698.3 734.7 Loans & Advances 253.5 376.8 380.6 384.4 388.2 Current Assets 960.2 1303.9 1595.8 1930.7 2641.3 Less: Current Liabilities & Provisions 755.2 1278.6 1469.1 1448.5 1518.7 Net Current Assets 205.0 25.3 126.6 482.3 1122.6 Miscellaneous Expenditure 0.0 0.0 0.0 0.0 0.0 Total Asset 3902.7 4979.8 6220.6 6314.0 6655.1 85
Cash Flow Statement Profit Before Tax 1166.2 1507.0 1329.1 1219.8 1118.1 Depreciation 226.3 237.2 317.4 372.3 399.3 Others -356.1-439.3-248.3-237.7-274.0 Cash flow from Operations before WC Change 1036.4 1304.9 1398.2 1354.4 1243.4 Changes In Working Capital 76.7 70.3 51.1-8.8 17.0 Cash flow from operations 1113.1 1375.3 1449.3 1345.7 1260.4 Capex -764.9-1798.9-1456.9-110.0-100.0 Inc/Dec in Investment -311.0 312.3 0.0 0.0 0.0 Others 30.4 44.8 0.0 0.0 0.0 Cash Flow from Investing activities -1045.5-1441.8-1456.9-110.0-100.0 Inc/Dec in Loan Funds 131.2 166.7 375.0-675.0-350.0 Inc/Dec in capital 0.0 0.0 0.0 0.0 0.0 Others -170.8-89.0-215.1-213.8-153.0 Cash flow from Financing -39.6 77.6 159.9-888.8-503.0 Net Cash Inflow / Outflow 28.0 11.1 152.4 346.9 657.3 Op Bal Cash & Cash equivalents 61.6 89.6 100.7 253.1 600.0 Closing Cash/ Cash Equivalent 89.6 100.7 253.1 600.0 1257.3 Ratios EPS 62.8 80.4 75.9 68.7 62.5 Cash EPS 81.0 99.4 101.2 98.4 94.4 EBIDTA margin (%) 28.9 31.2 26.2 25.6 22.3 NPM (%) 15.9 18.3 14.8 13.6 11.8 Net Debt Equity 0.8 0.6 0.5 0.2 0.0 RoNW (%) 55.8 45.2 30.4 21.8 16.7 RoCE (%) 43.0 40.7 28.9 23.4 19.9 Valuation Ratios P/E (x) 8.7 6.8 7.2 8.0 8.7 P/BV (x) 3.9 2.5 1.9 1.6 1.4 EV/EBIDTA (x) 5.5 4.8 5.1 4.6 4.4 EV/tonne in US$ 94.6 94.1 76.1 61.7 53.4 Turnover ratios Asset Turnover 1.7 1.4 1.3 1.1 1.1 Inventory turnover ratio 32.2 40.4 40.4 40.4 40.4 Debtors turnover ratio 13.6 14.4 14.4 14.4 14.4 86
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