Further correction needed in Ultratech Cement says Nomura

Further correction needed
 Largest pan-India cement producer
Post the merger with Samruddhi Cement, Ultratech has emerged as
the single largest pan-India cement producer, with an annual grey
cement capacity of 48.8mn tonnes, captive power of 504MW and
0.6mn tonnes of white cement. The merger also corrects the regional
skew of Ultratech’s capacity, and the company is now has evenly
spread across regions.
 Discount to other large-cap peers to narrow
Despite being a very large pure-play cement company, Ultratech
always used to trade at a discount to peers such as ACC and Ambuja
Cement due to its unbalanced regional mix. With this problem now
sorted out, we expect Ultratech to trade in line with valuations enjoyed
by ACC on a per tonne basis. The merger also brings white cement
capacity to Ultratech’s portfolio, which is a premium asset.
 Global aspirations – a cause for concern
We believe the company’s acquisition of ETA Star Cement in the
Middle East is unlikely to have any significant impact on its financials
as it is too small compared to the existing size of Ultratech. However,
any significant inorganic activity by the company outside of India may
put the strong cashflows from the existing business at some risk.
 Valuation
We now value Ultratech on an EV/IC-based method, in which we
derive the multiple using an average ROCE of 19% for the FY11-13F
period and a WACC of 12.2%. We retain our REDUCE rating on the
stock with a revised target price of INR897, which represents 17%
downside from the current level and implies an EV/EBITDA of 7.2x
and an EV/tonne of US$120 on Ultratech’s FY12F financials.