UltraTech - Earnings disappoint, downgrade to REDUCE.:: Kotak Sec

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UltraTech Cement (1,070)
Cement
Earnings disappoint, downgrade to REDUCE. We downgrade Ultratech to REDUCE,
taking cognizance of higher input cost and lower realizations as reflected in the 1,240
bps contraction in operating margins at 12%. UTCEM is currently trading at 12X on
FY2012E EPS and US$135/ton on FY2012E production and offers 3% downside to our
revised target price of Rs1,070/share. Higher-than-estimated increase in cement prices
in the coming quarters remains the key upside risk to our investment rationale.


Results marred by weak realizations and higher input costs
UTCEM reported revenues of Rs32.1 bn (-9.1% yoy, -19.4% qoq), operating profits of Rs4.1 bn (-
65.6% yoy, -59% qoq) and net income of Rs1.1 bn (-81% qoq) against our estimate of Rs32.9
bn, Rs5.6 bn and Rs2.5 mn, respectively. We note that all comparisons are on a like-for-like basis
(on a post-merger basis). Reported PAT of Rs1.16 bn includes prior period tax reversal of Rs102
mn.
Volumes at 9.1 mn tons (-7% yoy, -13.2% qoq) were in line with our estimates while average
realizations at Rs3,533/ton were marginally lower than our estimate of Rs3,619/ton. Lower-thanestimated
EBITDA was primarily on account of (1) higher raw material cost (Rs485/ton against our
estimate of Rs416/ton) and higher power and fuel cost (Rs927/ton against our estimate of
Rs873/ton). Operating margins contracted to 12.7% in 2QFY11 from 25.1% in 1QFY11.
Pricing weakness in 2QFY11 – South and West worst hit
UTCEM sells ~60% of its output in South and West, leading to 7.2% sequential decline in
realizations to Rs3,533/ton in 2QFY11 from Rs3,807/ton in 1QFY11. We highlight that the decline
in cement prices in 2QFY11 was much more magnified in South and West India as compared to
other regions. Average cement prices in South were down from Rs228/bag in May 2010 to
Rs217/bag in September 2010 while in West they were down from Rs232/bag in May 2010 to
Rs217/bag in September 2010. We believe that price hikes in September and plans for another
round of hikes in October will likely help improve realizations in 3QFY11E.
Downgrade to REDUCE with a revised target price of Rs1,070/share
We downgrade UTCEM to REDUCE (ADD previously) and recommend investors book profits on
the back of the recent outperformance and mid-cycle trading multiples. We have reduced our
target price to Rs1,070/share (previously 1,100/share), which implies an EV/EBITDA of 5.7X on
FY2012E earnings and EV/ton of US$131/ton on FY2012E production. We have revised our EPS
estimate to Rs54/share (previously Rs66/share) in FY2011E and to Rs93/share (previously
Rs99/share) in FY2012E, taking cognizance of higher input costs and weak realizations.