Buy UltraTech Cement for Rs 1200 target says ICICI Sec

UltraTech Cement (UTCL), post the merger with Grasim’s cement division, has
emerged as India’s largest cement company with ~49mnte capacity and ~19%
market share. Its geographic mix, which was skewed towards the West and the
South (~84%), would be more diversified with South, West and North constituting
27%, 25% and 23% respectively. We believe the larger entity would aid fund
raising and inorganic plans. With high quality and better profitability assets in
white cement and wall care putty, overall profitability would likely improve. UTCL
is focussing on improving its operating efficiency via increasing blending,
increased use of CPPs to 80% from the current 70% and better logistic
infrastructure. With capacity addition ahead of peers, better cost efficiency and
larger diversified pan-India presence, discount versus peers will likely reduce.
Maintain BUY with a price target of Rs1,200 (7.2x EV/E of average FY12-13E).
􀁦 Setting up 2mnte grinding unit at its Gujarat plant. UTCL exports ~2.5mnte
clinker from its Gujarat plant as it does not have adequate grinding units. UTCL,
accordingly, is expanding its jetty and setting up a 2mnte grinding unit to convert
clinker exports into cement. This is expected to be operational by Q4FY12, which
would improve blended realisations.
􀁦 Next expansion phase announced for setting up a 9.2mnte grinding unit in the
next three years at a capex of Rs56bn via brownfield expansion. This also includes
setting up additional clinkerisation plants at Chhattisgarh and Karnataka and bulk
packaging terminals across various states. Besides, Rs26bn would be spent on
augmenting grinding capacity in Gujarat and installing waste heat recovery systems.
The acquisition of 3mnte ETA Star Cement is likely to be completed soon.
􀁦 Strong cashflows. We expect UTCL, post its merger with Samruddhi Cement, to
generate Rs33bn FCF over FY11E-13E, resulting in D/E declining to 0.4x. Also,
cashflows from Grasim’s VSF division (say, via rights issue of equity shares to
Grasim) can also be utilised for expansion in cement.
􀁦 Margin performance to improve. Post the merger with Samruddhi Cement,
UTCL’s geographic mix would become more diversified, resulting in better
realisations. Also, due to slowdown in clinker export, clinker sale would come down
which would lead to better blended realisations. Besides, white cement assets have
better profitability. Also, lower external clinker purchase would lead to savings of
Rs45/te in FY11E. We factor in ~24-25% EBITDA margin and EPS CAGR of 18%
over FY11E-13E.We raise FY11-12E EBITDA by 5-8%.