All eyes on acquired assets

INDUSTRY CEMENT CMP (as on 19 Jul 2017) Rs 4,206 Target Price Rs 3,763 Nifty 9,900 Sensex 31,955 KEY STOCK DATA Bloomberg UTCEM IN No. of Shares (mn) 275 MCap (Rs bn) / ($ mn) 1,155/17,947 6m avg traded value (Rs mn) 1,072 STOCK PERFORMANCE (%) 52 Week high / low Rs 4,533 / 3,050 3M 6M 12M Absolute (%) 6.8 21.5 19.9 Relative (%) (2.2) 4.5 4.9 SHAREHOLDING PATTERN (%) Promoters 62.14 FIs & Local MFs 5.52 FPIs 21.89 Public & Others 10.45 Source : BSE Ankur Kulshrestha, CFA ankur.kulshrestha@hdfcsec.com +91-22-6171 7346 Meera Midha meera.midha@hdfcsec.com +91-22-6171 7334 All eyes on acquired assets UltraTech Cement (UTCEM) delivered strong profitability (EBITAD/t: Rs 1,183, 6.1% YoY, 30.2% QoQ), mainly owing to higher pricing (Rs 5,026/t, 7.3% QoQ, 7.2% YoY). Volumes were flat (13.2 mt),with domestic sales witnessing a 1% decline. With JPA capacities (17.2 mtpa operational) in the bag, volume growth will resume from 2QFY18. However, JPA s capacities, operating at 15% in 1QFY18, are likely to drag down profitability too. UltraTech has guided for cash break-even in the fourth quarter of operations (1QFY19), and utilisation of 70% by then. We believe a cash breakeven is possible, but remain skeptical on utilisations, given the lack of clarity on Bara (4.0 mtpa grinding) and JP Super (2.3 mtpa clinker), both under commissioning. UTCEM remains expensive (17.9/13.8x FY18/19E EV/EBITDA) on modest return expectations (13.0/14.2% RoE in FY18/19E). We build in EBITDA/t of Rs 360/921 from the acquired units in FY18/19E. RESULTS REVIEW 1QFY18 20 JUL 2017 UltraTech Cement SELL Our revised TP stands at Rs 3,763 (12.0x June 19 EV/EBITDA, USD199/t. Highlights of the quarter P&F costs (32% YoY, 12.5% QoQ) continue to harden, as petcoke pricing finally impacts. (~58% up YoY). Proportion of petcoke in the overall mix remains high, and further gains will likely accrue only from acquired capacities scaling up their petcoke usage. Overall operational costs (Rs 3,843/t, 7.7% YoY, 1.7% QoQ) hardened too, offsetting a large part of the pricing gains. Near-term outlook: Cement prices continue to remain strong, with adjustments owing to GST (~3-4% or Rs 10-15) in most regions. However, demand is likely to dip now, given the strong onset of monsoon. Continuing issues with sand availability in some key states (UP, Punjab, Tamil Nadu) and drought will further weigh on demand. Financial Summary (Standalone) (Rs mn) 1QFY18 1QFY17 YoY(%) 4QFY17 QoQ(%) FY16 FY17 FY18E FY19E FY20E Net Sales 66,265 61,823 7.2 65,953 0.5 234,402 236,157 315,519 381,068 435,430 EBITDA 15,601 14,225 9.7 12,782 22.1 49,615 54,907 72,446 91,241 106,137 PAT 8,906 7,576 17.6 7,784 14.4 24,641 27,112 33,122 40,399 53,546 Diluted EPS (Rs) 32.19 27.61 16.6 21.81 47.6 86.4 96.2 120.6 147.1 195.0 P/E (x) 48.7 43.7 34.9 28.6 21.6 EV / EBITDA (x) 24.0 21.1 17.9 13.8 11.3 RoE (%) 11.5 11.6 13.0 14.0 16.2 HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters

Quarterly Financials Snapshot (Rs mn) 1QFY18 1QFY17 YoY (%) 4QFY17 QoQ (%) Net Sales 66,265 61,823 7.2 65,953 0.5 Power & Fuel 12,174 9,237 31.8 11,543 5.5 Freight Expenses 15,880 15,452 2.8 16,645 (4.6) RM Costs 10,228 10,010 2.2 10,666 (4.1) Other Operating Expenses 12,383 13,402 (7.6) 14,316 (13.5) EBITDA 15,601 14,225 9.7 12,782 22.1 Other Income 1,652 1,504 1,023 Interest Cost 1,285 1,525 (15.7) 1,189 8.0 Depreciation 3,098 3,027 3,357 PBT 12,870 11,177 15.1 10,160 26.7 Tax 3,963 3,428 3,276 RPAT 8,906 7,576 17.6 6,883 29.4 E/o 0 0 901 APAT 8,906 7,576 17.6 7,784 14.4 Note: Reported revenues/ebitda now inclusive of other op. inc. E/O Fourth consecutive quarter of flattish volumes, realisations drove the show. Costs now reflect the full impact of pet-coke pricing surge Per Tonne Analysis Per tonne data 1QFY18 1QFY17 YoY (%) 4QFY17 QoQ (%) Volumes (Blended, mt) 13.2 13.2 (0.1) 14.1 (6.3) Blended realisations (Rs/T) 5,026 4,684 7.3 4,689 7.2 P&F costs (Rs/T) 923 700 32.0 821 12.5 Freight costs (Rs/T) 1,204 1,171 2.9 1,183 1.8 RM costs (Rs/T) 776 758 2.3 758 2.3 Other costs (Rs/T) 939 1,015 (7.5) 1,018 (7.7) Cement EBITDA/T (Rs/t) 1,183 1,116 6.1 909 30.2 Costs 3,843 3,568 7.7 3,780 1.7 Page 2

Fourth consecutive quarter of flattish volumes, realisations drove the show. Costs now reflect the full impact of pet-coke pricing surge Key takeaways from the conference call Comments on demand Sector currently witnessing a demand shift to organised RE developers as a result of RERA imposition. Pressure in the IT sector likely to impact the new housing demand Rural markets are holding up well due to good sowing earlier on. Strong monsoons will help further Disbursement of HRA for 7 th Pay Commission may drive the demand from urban markets. At present, the housing segment seems to be declining by 2% give or take. Affordable housing should give it a fillip. UltraTech expects ~2 years for the organised RE to recover. Operational data Recent weakness in pet-coke prices. Petcoke remains attractive (USD 87-90 is the current price). Petcoke content is now at 60% in the energy mix. This can be taken to 75%. C:C ratio of UltraTech at 1.34 now. Capacity utilisation : North/West at 80%, east at 90%, South at 60%, Central at 70% On JPA assets Post acquisition, UTCEM is still operating the old brand (Jaypee Cement) in Central India. It sells Rs 15-20 below category A prices. JPA utilisation numbers for the last quarter should cross 60% by the end of FY18. Likely to see average realisations of 70% in 4th quarter of operations. Central region will witness the maximum improvement EBITDA of Rs 400/t in the operating assets currently. Large part of the EBITDA is driven by tax incentives (Please refer next page for complete list of incentives enjoyed by JPA) Petcoke composition can be increased significantly in the acquired plants. Limestone constraints in 1-2 plants, where the pet-coke content will be lower Cash breakeven by 4th quarter of operations Super Dalla to be operational sometime during the year Net debt at June end: Rs 128.7bn (standalone nos) - largely in line. Based on quick calculations it should have ended at Rs 125.7bn (Ending net cash Rs24.22bn less JPA acquisition (Rs 161.9bn) plus 1QFY18 PAT + depreciation (Rs 12.0bn). There is ~Rs 3bn expansion in working capital, going by these numbers. Page 3

Valuations continue to remain expensive. Grasim preferable vehicle of exposure UTCEM is expected to be the key beneficiary of a resurgent cement demand and we expect sharp volume growth Peer Valuation Company EV/EBITDA MCAP CMP TP P/E (x) EV/T (US$) RoE (%) Reco. (x) (Rs. bn) (Rs) (Rs) FY18E FY19E FY18E FY19E FY18E FY19E FY18E FY19E Ultratech Cement 1,155.1 4,206 SELL 3,763 34.9 28.2 17.9 13.8 285 237 13.0 14.2 Shree Cement 636.1 18,257 SELL 14,565 53.5 34.8 22.8 15.7 264 240 15.7 20.4 Ambuja Cement 1 523.9 265 SELL 200 38.3 27.2 15.5 11.5 172 165 17.4 21.8 ACC Ltd 1 326.4 1,735 SELL 1,459 30.1 22.2 15.7 12.2 145 141 11.2 14.8 Ramco Cements 165.7 696 SELL 690 22.7 20.5 13.7 12.1 204 195 18.1 17.3 Birla Corp 72.0 935 NEU 1,005 40.5 27.3 12.8 11.0 120 114 5.3 7.5 Orient Cement 32.7 160 NEU 165 44.4 15.1 11.6 8.4 72 69 5.8 13.1 Sanghi Industries 21.2 96 BUY 98 12.6 7.9 6.9 4.8 96 86 14.0 18.9 Note: Prices as of July 19, 2017 close. US$: INR = 65 1 December YE Key Assumptions Year Ending June FY16 FY17E FY18E FY19E FY20E Clinker Utilisation 76% 76% 62% 64% 71% Blended Volumes 49.3 50.2 59.4 70.8 77.5 Ultratech Standalone 49.3 50.2 52.9 56.2 62.1 Acquired Ops 6.5 13.3 15.4 Blended Realisations 4,632 4,706 5,316 5,484 5,616 Ultratech Standalone 4,632 4,706 4,957 5,205 5,387 Acquired Ops 4,573 4,750 4,752 P&F Cost/Tonne 860 782 810 744 731 Raw Material Cost/Tonne 810 787 772 748 779 Freight Cost/Tonne 1,037 979 1,093 1,072 1,152 EBITDA/Tonne 884 935 1,144 1,241 1,298 Ultratech Standalone 884 935 1,240 1,317 1,368 Acquired Ops 358 921 1,013 Cost/Tonne 3,748 3,770 4,172 4,243 4,318 Page 4

The acquired capacities have units whose commissioning will still take time Most levy assumptions run out in a short time Assets Included In The Transaction Location Plant Capacity (mtpa) Clinker Cement Dalla IC 2.1 0.5 JP Super* C 2.3 Tanda GU 1.0 Sikanderabad GU 1.0 Bara* GU 4.0 Bela IC 2.1 2.6 Sidhi IC 3.1 2.3 Satna Cluster 9.6 11.4 Baga IC 3.3 1.7 Bagheri GU 2.0 Roorkee GU 1.1 HP Cluster 3.3 4.8 Balaji IC 3.3 5.0 Shahabad GU 1.2 South Cluster 3.3 6.2 Total 16.2 22.4 * Under commissioning, IC: Integrated cement and clinker unit, C: Clinker only, GU Grinding unit Key Levy Exemptions Available To Jaypee Associates Capacity Plant Exemption (mtpa) Applicable till Remainder period (months) * Dalla 0.5 10-year refund on VAT/CST Jan-18 7 Dalla 0.5 Exemption on payment of royalty on limestone Jan-18 7 Bahgeri 0.5 VAT Deferment Mar-18 9 Sidhi 2.3 Refunds of 75% of VAT/CST deposited Feb-19 20 Tanda 1.0 Interest free VAT loan Oct-19 28 Roorkee 1.1 Excise exemption Dec-19 30 Bagheri 2.0 Excise exemption Jan-20 31 Baga 1.7 Excise duty exemption Feb-20 33 Baga 1.7 VAT/CST exemption Feb-20 33 Sikandrabad 1.0 Interest free VAT loans Apr-26 108 Page 5

Headline profitability at Rs 1,180/t, costs have flattened Volume growth remains sluggish Sales volume (mt) mnt 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 YoY% 20.0 15.0 10.0 5.0 - (5.0) Realisations improved across country 5,500 5,000 4,500 4,000 3,500 3,000 Blended realisations (Rs/T) YoY (%) Rs/T % 35.0 30.0 25.0 20.0 15.0 10.0 5.0 - (5.0) (10.0) (15.0) 1QFY12 3QFY12 1QFY13 3QFY13 1QFY14 3QFY14 1QFY15 3QFY15 1QFY16 3QFY16 1QFY17 3QFY17 1QFY18 1QFY12 3QFY12 1QFY13 3QFY13 1QFY14 3QFY14 1QFY15 3QFY15 1QFY16 3QFY16 1QFY17 3QFY17 1QFY18 EBITDA/t At Rs 1,183 EBITDA/T (Rs) YoY (%) 1,400 Rs/T % 1,200 1,000 800 600 400 200-80.0 60.0 40.0 20.0 - (20.0) (40.0) (60.0) Costs Have Flattened P&F costs/t Freight cost/t RM cost/t Emp cost/t Other exp/t 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500-1QFY12 3QFY12 1QFY13 3QFY13 1QFY14 3QFY14 1QFY15 3QFY15 1QFY16 3QFY16 1QFY17 3QFY17 1QFY18 1QFY12 3QFY12 1QFY13 3QFY13 1QFY14 3QFY14 1QFY15 3QFY15 1QFY16 3QFY16 1QFY17 3QFY17 1QFY18 Page 6

Income Statement Year ending March (Rs mn) FY16 FY17 FY18E FY19E FY20E Net sales 234,402 236,157 315,519 381,068 435,430 Growth % 3.5 0.7 33.6 20.8 14.3 Material Expenses 100,712 98,516 115,145 125,949 140,793 Employee Expenses 13,430 14,134 15,955 17,551 19,306 SG&A Expenses 71,134 70,504 105,521 139,780 162,571 Other operating expenses 5,546 6,070 11,000 11,550 12,128 Operating profits 43,580 46,933 67,898 86,239 100,634 Operating Profit Margin (%) 18.6 19.9 21.5 22.6 23.1 Other operating income 6,034 7,974 4,548 5,003 5,503 EBITDA 49,615 54,907 72,446 91,241 106,137 EBITDA % 21.2 23.3 23.0 23.9 24.4 EBITDA Growth % 18.3 10.7 31.9 25.9 16.3 Depreciation 12,031 11,981 16,130 23,770 25,008 EBIT 37,584 42,926 56,316 67,471 81,129 Other Income (including EO items) 1,458 1,245 1,245 1,245 1,245 Interest 5,117 5,714 10,244 11,003 5,880 PBT 33,925 38,457 47,317 57,713 76,494 Tax 9,284 11,482 14,195 17,314 22,948 RPAT 24,641 26,975 33,122 40,399 53,546 EO (Loss) / Profit (Net Of Tax) 0-137 0 0 0 APAT 24,641 27,112 33,122 40,399 53,546 APAT Growth (%) 22.3 10.0 22.2 22.0 32.5 Adjusted EPS (Rs.) 86.4 96.2 120.6 147.1 195.0 EPS Growth (%) 17.6 11.3 25.4 22.0 32.5 Balance Sheet As at March (Rs mn) FY16 FY17 FY18E FY19E FY20E SOURCES OF FUNDS Share Capital 2,745 2,746 2,745 2,745 2,745 Reserves 213,574 236,665 266,483 303,578 353,820 Total Shareholders Funds 216,319 239,411 269,228 306,323 356,565 Long Term Debt 26,748 42,001 182,001 62,001 47,001 Short Term Debt 58,855 22,972 22,972 22,972 22,972 Total Debt 85,604 64,973 204,973 84,973 69,973 Deferred Taxes 24,320 27,736 27,736 27,736 27,736 Long Term Provisions & Others 2,538 3,080 3,080 3,080 3,080 TOTAL SOURCES OF FUNDS 328,780 335,199 505,017 422,112 457,354 APPLICATION OF FUNDS Net Block 230,942 235,205 380,965 392,195 377,187 CWIP 14,156 8,784 33,784 15,784 15,784 Investments 7,246 7,460 7,460 7,460 7,460 LT Loans and Advances 6,122 4,044 4,044 4,044 4,044 Total Non-current Assets 258,465 255,493 426,253 419,483 404,475 Inventories 22,776 22,250 25,726 27,616 33,152 Debtors 14,149 12,762 18,667 16,277 23,531 Other Current Assets 14,397 13,312 13,312 13,312 13,312 Cash & Equivalents 73,119 88,995 88,395 7,959 57,030 Total Current Assets 124,441 137,318 146,100 65,163 127,026 Creditors 15,815 17,138 26,862 22,059 33,672 Other Current Liabilities & Provns 38,312 40,474 40,474 40,474 40,474 Total Current Liabilities 54,126 57,612 67,336 62,533 74,146 Net Current Assets 70,315 79,706 78,764 2,630 52,879 TOTAL APPLICATION OF FUNDS 328,779 335,199 505,017 422,112 457,354 Page 7

Cash Flow Year ending March (Rs mn) FY16 FY17 FY18E FY19E FY20E Reported PBT 32,986 37,760 47,317 57,713 76,494 Non-operating & EO items 1,991 (1,382) (1,245) (1,245) (1,245) Interest expenses 5,117 5,714 10,244 11,003 5,880 Depreciation 12,031 11,981 16,130 23,770 25,008 Working Capital Change 1,367 5,783 342 (4,302) (1,178) Tax paid (9,284) (11,482) (14,195) (17,314) (22,948) OPERATING CASH FLOW ( a ) 44,206 48,373 58,593 69,625 82,011 Capex (19,728) (11,079) (186,890) (17,000) (10,000) Free cash flow (FCF) 24,478 37,294 (128,297) 52,625 72,011 Investments (26) (214) 0 0 0 Non-operating Income 1,425 1,382 1,245 1,245 1,245 INVESTING CASH FLOW ( b ) (18,329) (9,911) (185,645) (15,755) (8,755) Debt Issuance/(Repaid) 4,168 (20,631) 140,000 (120,000) (15,000) Interest expenses (5,117) (5,714) (10,244) (11,003) (5,880) FCFE 23,530 10,950 1,460 (78,377) 51,131 Share Capital Issuance 0 0 0 0 0 Dividend (3,138) (3,304) (3,304) (3,304) (3,304) FINANCING CASH FLOW ( c ) (4,086) (29,648) 126,453 (134,306) (24,184) NET CASH FLOW (a+b+c) 21,792 8,814 (600) (80,436) 49,072 EO Items/Others Closing Cash & Equivalents 73,114 81,933 88,395 7,959 57,030 Key Ratios FY16 FY17 FY18E FY19E FY20E PROFITABILITY (%) EBITDA Margin 21.2 23.3 23.0 23.9 24.4 APAT Margin 10.5 11.5 10.5 10.6 12.3 RoE 11.5 11.6 13.0 14.0 16.2 Core RoCE 14.8 16.5 14.3 13.2 16.2 RoCE 11.2 11.6 11.0 11.7 14.9 EFFICIENCY Tax Rate (%) 28.1 30.4 30.0 30.0 30.0 Asset Turnover (x) 0.8 0.8 0.8 0.8 0.9 Inventory (days) 36 33 26 23 22 Debtors (days) 16 18 16 15 15 Payables (days) 21 21 19 21 21 Cash Conversion Cycle (days) 31 30 23 17 16 Debt/EBITDA (x) 1.9 1.6 2.0 1.7 0.8 Net D/E 0.1-0.1 0.4 0.3 0.0 Interest Coverage 7.4 7.6 5.6 6.2 14.0 PER SHARE DATA EPS (Rs/sh) 86.4 96.2 120.6 147.1 195.0 CEPS (Rs/sh) 130.2 139.4 179.4 233.8 286.2 DPS (Rs/sh) 9.5 10.0 10.0 10.0 10.0 BV (Rs/sh) 788.4 872.1 980.8 1115.9 1298.9 VALUATION P/E 48.7 43.7 34.9 28.6 21.6 P/BV 5.3 4.8 4.3 3.8 3.2 EV/EBITDA 24.0 21.1 17.9 13.8 11.3 OCF/EV (%) 3.7% 4.1% 5.1% 6.1% 6.7% FCF/EV (%) 2.1% 3.2% -11.2% 4.6% 5.9% FCFE/Market Cap (%) 2.0% 0.9% 0.1% -6.8% 4.4% Dividend Yield (%) 0.2 0.2 0.2 0.2 0.2 Page 8

RECOMMENDATION HISTORY Ultratech 4,600 4,400 4,200 4,000 3,800 3,600 3,400 TP Date CMP Reco Target 20-Jul-16 3,560 NEU 3,200 7-Oct-16 3,960 NEU 3,931 18-Oct-16 4,013 NEU 3,931 23-Jan-17 3,528 NEU 3,380 13-Apr-17 4,033 SELL 3,380 26-Apr-17 4,242 SELL 3,380 20-Jul-17 4,206 SELL 3,763 3,200 3,000 Rating Definitions 2,800 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period Page 9

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