UltraTech Cement:: Restructuring priced in: Elara

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Restructuring priced in
Merger with Samruddhi Cement creates a global giant
UltraTech Cement Limited (UltraTech) has emerged as the world’s
ninth largest cement manufacturer following the merger of Samruddhi
Cement Limited (SCL) with itself. It will be the largest cement company
in India, having a capacity of 52.4mn tonnes - almost double the
capacity of the second and third players, viz: ACC and Ambuja. Apart
from this, post the merger, UltraTech has a presence in all five major
regions, thereby eliminating the regional risk. Furthermore, the merger
is also expected to increase FY12 EPS of the company by 10.3%.(Kindly
refer to Exhibit 4 on page no 27)


Healthy balance sheet to ensure smooth capex deployment
At the end of FY10, UltraTech’s net debt to equity ratio was 0.3 and
gross cash and investment was INR17.5 bn. Lower debt equity ratio
and bigger size of the balance sheet will enable the company to
smoothly fund its next round of expansion. The company has already
announced the second round of expansion to increase (consolidated)
the capacity by 9.2mn tonnes to 61.6 mn tonnes.

Valuation discount to ACC, Ambuja to diminish
UltraTech has historically traded at a discount of~18% to ACC and
~33% to Ambuja due to various reasons including lower free float,
higher regional risk and dependence on expensive sources of power.
Post the restructuring, UltraTech’s free float as well as regional mix has
improved. Further, UltraTech has added 211MW of CPP capacities in
the last two years. Due to an increase in CPP capacity, its dependence
on the external source of power is expected to come down to ~5% in
FY11 and FY12 from 75% prior to FY10. We expect the CPP to result
in a saving of INR 137/tonne(INR 5.2 bn) from FY11 and INR165/
tonne (INR 7.8bn) in FY12 .Thus with the improving profitability and
better free float, we expect the valuation gap between UltraTech and
Ambuja to be bridged in the medium term.

Valuation
UltraTech will enjoy benefits of higher scale of operations coupled
with cost savings due to increased consumption of captive power.
However, the stock is already trading at close to 38% premium to its
replacement cost and close to our discounted upcycle EV/tonne.
We have valued UltraTech’s grey cement business at EV/tonne of
USD140 and the white cement business at a conservative valuation
of USD186/tonne. Accordingly, we initiate our coverage on
UltraTech with a Reduce and a target price of INR 1,139.