UltraTech Cement: expects gradual recovery in margins: Motilal Oswal

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UltraTech Cement (UTCEM IN; Mkt Cap USD6.1b, CMP Rs1,019, Neutral) 

Results are not comparable YoY due to merger of Samruddhi Cement. 2QFY11 are rebased for QoQ comparisons.

Volumes were flat YoY (~7% QoQ growth) on like-to-like basis at 9.8MT (vs est 10.1MT). Grey cement realization at Rs3,159/ton (up 7% QoQ; est Rs3,192/ton).

Sales were at Rs37.1b (vs est Rs38.2b) and PAT at Rs3.19b (vs est Rs3.47b). EBITDA was up by 74% QoQ at Rs7.08b (vs est Rs7.44b), EBITDA margin at 19.1% (~640pp QoQ recovery) and EBITDA/ton of 

 Rs712 (vs est Rs695).

The management believes trough in the cycle is behind us and expects gradual recovery in margins to normal levels by FY13.

 2HCY10 is expected to be bottom-of-the-cycle period for the cement industry. Cement prices are expected to be buoyant in 1HCY11 driven by recovery in demand. We maintain our estimates for FY12E at Rs62.8 

and for FY13 to Rs96.9, as upgrade in pricing assumption is negated by lower volumes and higher cost push. The stock trades at 16.2x FY12 and 10.5x FY13 EPS, and EV/Ton of US$123. Maintain Neutral with 

 target price of Rs1,254 (~10x FY12 EV/EBITDA).

Recovery in volumes, realizations drive QoQ revenue growth
Volumes at 9.8m tons were flat YoY, as domestic volumes remained muted (flat YoY, +3%
QoQ). Grey cement business realization at Rs3,159/ton was up 7.4% QoQ, driven by
12% QoQ improvement (3% YoY decline) in domestic cement realizations. Clinker and
cement export realization also improved by ~Rs5/bag QoQ. White cement volumes grew
10.3% YoY. This coupled with higher realization (~5% YoY & ~1% QoQ) and 35% YoY
growth in wall care putty volumes drove 24.5% YoY (~12.5% QoQ) growth in white
cement revenue. On like-to-like basis, revenue was flat YoY (~16% QoQ growth) at
Rs37.15b.

Stable cost drives recovery in EBITDA
EBITDA recovered 74% QoQ (~25% YoY decline on like-to-like basis) to Rs7.08b,
translating into EBITDA margin of 19.1% (~640bp QoQ improvement, 700bp YoY decline)
and EBITDA/ton of Rs715. Low cost imported coal inventory insulated 3QFY11 financial
performance, as energy cost was stable QoQ. However, benefits of higher operating
leverage were negated by increase in freight cost (~5% QoQ) and higher coal cost (~5%
QoQ). As a result, comparable PAT declined 36% YoY (~63% QoQ growth) to Rs3.19b
(v/s our estimate of Rs3.47b).

Star Cement (UAE-based subsidiary) posts net loss of Rs270m
In September 2010, Ultratech completed the acquisition of Star Cement, a 3m-ton UAEbased
cement company. Star Cement reported volumes of 0.75m tons for 3QFY11, with
EBITDA of ~Rs75m (~Rs100/ton). However, it reported a loss of Rs270m for the quarter.
Star Cement's loss would be reflected in consolidated results, which would be reported on
annual basis. However, Grasim's consolidated results would be accounting for Star Cement
on quarterly basis.

Mega capex plans to add 9.2m ton capacity, taking total capex to Rs102b
Ultratech has capex plans of Rs102b over the next 3-4 years. It is setting up a Rs56b,
9.2m-ton brownfield capacity, along with split grinding units and packaging terminals,
expected to commence operations by 4QFY13. Further, it is investing Rs45.6b in adding
CPPs, enhancing logistics infrastructure, RMC business, and modernization & upgradation.
This capex would be funded through a mix of internal accruals and debt.

Positive outlook for industry, with normal margins expected in FY13
The management expects cement demand to grow at over 10% for the next five years. It
expects margins to return to normalcy during FY13. It believes that the trough in the
cement cycle is behind us; resumption of construction activity post monsoon should sustain
recent price increases. The company would focus on consolidating and further strengthening
its leadership position by investing in new capacity as well as maintaining its cost leadership.

Valuation and view
2HCY10 is expected to be the bottom-of-the-cycle period for the cement industry. Cement
prices are expected to be buoyant in 1HCY11, driven by recovery in demand. While longterm
outlook for the cement sector is positive, recovery in short-term is expected to be
gradual and prices are expected to remain volatile as excess capacity is absorbed.
We maintain our EPS estimates at Rs62.4 for FY12 and at Rs97 for FY13, as upgrade in
pricing assumption is negated by lower volumes and higher cost push. The stock trades at
16.3x FY12E and 10.5x FY13E EPS, and EV of US$123/ton (FY12E capacity of 51.4m


UltraTech Cement: an investment profile
Company description
UltraTech Cement, the erstwhile cement division of L&T,
is a subsidiary of Grasim, a part of the Aditya Birla Group.
Post merger of Grasim's cement business, it is the largest
cement company in India, with a total cement capacity of
50m tons and a pan-India presence. It is the largest exporter
of cement and clinker from India. Post merger of Grasim's
cement business, it is the 10th largest cement company in
the world.
Key investment arguments
 Largest cement company, with pan-India presence.
 Potential to increase throughput without incurring major
capex by increasing utilization and blending, along with
locational advantage gives it the flexibility to either export
or sell in the domestic market.
 Significant potential to increase throughput by increasing
blending.
Key investment risks
 High operating leverage could result in volatile earnings.
 Being the largest exporter of cement, UltraTech's
earnings are sensitive to export realizations.

Valuation and view
 The stock trades at 16.3x FY12E and 10.5x FY13E
EPS, and EV of US$123/ton (FY12E capacity of 51.4m
tons).
 Maintain Neutral with a target price of Rs1,254 (EV
of ~10x FY12E EBITDA).
Sector view
 The sector would continue to be plagued by overcapacity
at least till December 2011 and we expect
volatility in cement prices and cement companies'
performance over the next 6-9 months.
 However, we believe we have already witnessed
bottom-of-the-cycle utilization and profitability, and there
should be gradual improvement hereon, given
sustainable demand drivers.
 Cement prices likely to be volatile in the next 6-9 months.
tons). Maintain Neutral with a target price of Rs1,254 (EV of ~10x FY12E EBITDA).