Macquarie Research:: Ultratech Cements- South connections

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Ultratech Cements-South connections

Event
 3Q results – recovery as expected: Ultratech reported results that were
mostly in line with our estimates, driven by sharply higher cement prices in
South India. This recovery was driven by supplier discipline and we believe is
on shaky footing given weak fundamentals. We maintain our Underperform
recommendation and target price.

Impact
 Results in line with estimates: Net sales came in at Rs37.15bn, compared
with our estimate of Rs36.0bn. The despatches were in line with our
estimates, with higher-than-expected realisations offsetting this shortfall due
to a recovery of prices. EBITDA came in at Rs7.1bn, compared with our
estimate of Rs6.8bn, and EBITDA per ton came in at Rs725/t, compared with
our estimate of Rs698/t. PAT, at Rs3.18bn, was 5% above our estimate.
 Costs pressure to be reflected from now on: Ultratech’s costs were flat in
this quarter and did not reflect the recent 20% increase in coal prices. We
believe that 4Q FY11 and 1Q FY12 will see an impact from this increase as
well as a recent increase in railway freight. As compared with EBITDA/t of
Rs725/t achieved this quarter, we are expecting Rs717/t for FY12.
 Cement price recovery expected, but a muted one: Getting into the busy
season, we expect cement prices to inch up marginally; however, oversupply
issues are far from over and will likely keep a lid on prices over the next 12–
15 months. Clinker inventory is already at an eight-year high at 24–25 days of
consumption, with capacity utilisation still weak around 78%.
 Downside to our and consensus earnings: UTCEM has achieved only 40%
of the FY11 consensus estimate in the first three quarters and should see a
sharp earnings cut of about 20%. We are reviewing our sector call and will
come back with further details post the results of the major cement companies.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs818.00 based on a DCF methodology.
 Catalyst: Continued weak demand and volume.
Action and recommendation
 Maintain Underperform: Given the risks of earnings downgrades, we see
further downside. On current earnings UTCEM is trading at a 14.4x PER and
is one of the most expensive stocks under our coverage. We maintain our
Underperform rating.