UltraTech Cement – 3QFY2011 Result Update Angel Broking

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 UltraTech Cement – 3QFY2011 Result Update

Angel Broking maintains a Neutral on UltraTech Cement.

For 3QFY2011, Ultratech Cement (ULTC) posted a robust 175.5% qoq growth in
bottom-line to `319cr, aided by a 12% improvement in realisation. Dispatches
rose by 4% qoq to 9.16mn tonnes. The company’s EBITDA per tonne increased by
72.4% qoq to `773. Going ahead, we expect demand to improve due to pick up
in the construction activity during 4QFY2011. However, realisations would remain
at current levels due to excess capacity. We remain Neutral on the stock.

OPM up 612bp qoq: During 3QFY2011, the company’s operating profit rose by
a robust 67.6% qoq to `733cr on the back of better realisation. OPM spiked by
612bp qoq to 19.6% despite higher power and fuel costs. Input costs were higher
due to the increase in coal prices, which moved up to US $125/tonne in
3QFY2011from US $92/tonne in 3QFY2010. However, on a like-to-like (LTL)
basis, net sales were flat at `3,715cr yoy. The LTL operating profit was also lower
by 24.6% yoy due to the 3% decline in realisation and higher coal costs.


Outlook and valuation: We expect ULTC to post 44.0% CAGR in top-line over
FY2010-12 aided by higher volumes, while bottom-line is expected to register
CAGR of 10.5% during the mentioned period. At current levels, the stock is
trading at an EV/EBITDA of 10.9x based on FY2012 estimates. Valuing ULTC at
EV/tonne of US $110/tonne, our fair value works out to `1,050. We remain
Neutral on the stock.

Operational performance

For 3QFY2011, the company’s realisation per tonne fell by 3% yoy to `4,084.

However, realisations were higher by 11.9% on qoq basis. The

raw material costs per tonne de-grew by 6.7% yoy, but rose by 10.0% on qoq

basis. Power costs rose by 20.8% yoy on account of the substantial increase in the

coal prices, which increased to US $125/tonne in 3QFY2011 from

US $92/tonne in 3QFY2010. Freight cost per tonne was higher by 19.4% yoy

due the rise in diesel costs. Net profit per tonne for the quarter declined by 21.8%

yoy to `348.

Investment Arguments
ULTC has emerged as India’s largest cement manufacturer: Post the merger of
Samruddhi (erstwhile cement division of Grasim) with itself, ULTC has now become
India’s largest cement player with a pan-India presence. It has also acquired the
overseas cement assets of Dubai-based ETA Star, which would take its overall
capacity to 52mn tonnes. ETA Star’s manufacturing facilities include a 2.3mtpa
clinkerisation plant and a 2.1mtpa grinding capacity in the UAE, and 0.4mtpa and
0.5mtpa grinding facilities in Bahrain and Bangladesh, respectively. In addition,
ULTC has a capital outlay of `10,000cr to be spent over the next three years for
setting up additional clinkerisation plants at Chattisgarh and Karnataka along with
grinding units and bulk packaging terminals across various states. Post these
expansions, the company’s total capacity is expected to go up by 9.2mtpa, which is
expected to be operational by FY2014.
Pan-India presence to insulate ULTC from price volatility: ULTC has been enjoying
good brand equity, which has only strengthened post the Samruddhi merger along
with getting insulated from the wide variations in regional demand and price
volatility. Post the merger, ULTC would enjoy synergic benefits by way of superior
operating efficiencies due to its larger size.
Increased use of captive power to protect margins: Currently, ULTC has 580MW of
power capacity. It is setting up another 86MW of capacity which when operational
will cater to 80% of its overall power requirements in FY2012. Besides, an increase
in blending aided by its grinding units will result in increased overall efficiency and
lower power consumption from the current 87units/tonne to ~80units/tonne.
Outlook and valuation: We expect demand to improve due to the pick up in
construction activity during 4QFY2011. However, realisations are expected to
remain at current levels due to surplus capacity. We expect ULTC to post 44.0%
CAGR in top-line over FY2010-12 aided by higher volumes, while bottom-line is
expected to register CAGR of 10.5% over the mentioned period. At current levels,
the stock is trading at 10.9x FY2012E EV/EBITDA. We have valued ULTC at an
EV/tonne of US $110/tonne to arrive at a fair value of `1,050. We remain Neutral
on the stock.