ULTRATECH CEMENT Upside capped :: Edelweiss

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ULTRATECH CEMENT
Upside capped



􀂄 Revenues in line with estimates; PAT significantly lower
UltraTech Cement’s (UTCL; merged cement entity of the Aditya Birla Group)
Q2FY11 revenues were in line with our estimate at INR 32.15 bn, but PAT was
significantly down at INR 1.16 bn against our estimate of INR 2.3 bn. Grey
cement volumes dipped 12% and realisation slipped INR 20/bag at INR 3,025/t
sequentially. Lower white cement volumes were compensated by higher
realisations Q-o-Q. However, overall, decline in UTCL’s revenues was 19% Q-o-
Q. Blended EBITDA/t declined 54% to INR 437 vis-à-vis INR 949 during Q1FY11
on account of higher power and lower realisations.
􀂄 Increase in costs dents margins
Higher cost of raw materials such as slag, fly ash, and aggregates was offset by
stock adjustments keeping the effective raw material cost per tonne broadly flat.
Freight cost per tonne also remained flat Q-o-Q. However, power and fuel cost
increased from INR 846/t in Q1FY11 to INR 905/t in Q2FY11, possibly due to
higher monsoon-related consumption. Y-o-Y, increase was led by higher cost of
imported coal (50% coal requirement imported) which increased from USD 76/t
to 110/t. Other expenses were stable Q-o-Q.
􀂄 Expansion continues; Amalgamation of Samruddhi
UTCL has guided for a capex of INR 100 bn over the next three years. Out of
which, INR 50 bn will be spent on its two plants at Karnataka (4.8 mtpa) and
Chhattisgarh (4.2 mtpa) expected to be operational by FY13 end and the balance
will be spent on logistics, power plants, and debottlenecking at various locations.
No new capacity will come on stream till FY13. The scheme of amalgamation
with Samruddhi is effective from July 1, 2010. UTCL’s wholly owned subsidiary
Ultratech Middle East Investments has completed acquisition of ETA Star Cement
with 3.1 mtpa capacity. Post this, UTCL’s combined capacity will stand at 52
mtpa.
􀂄 Outlook and valuations: Upside capped; maintain ‘REDUCE’
Our dealer interactions suggest healthy demand growth for H2FY11, but we
believe over supply will continue to hamper realisations and the recent price
hikes of INR 10-50/bag are likely to correct. We introduce FY11 and FY12
estimates for the merged entity ( i.e., erstwhile Ultratech and Samruddhi).
The stock is currently trading at EV/T of USD 157/t on FY12E numbers. We do
not see upsides from current levels and maintain our ‘REDUCE’ recommendation
on the stock. On relative return basis we rate it ‘Sector Underperformer’.