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Ultratech Cement Ltd.

Numbers in Line - Maintain REDUCE

REDUCE

CMP: Rs 1,019                                       Target Price: Rs 1,040

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n     PAT at Rs3.19 bn (175.5% qoq) – in line. Revenues up15.6% qoq- volumes up 5.7% qoq, realisations jump up 9.3% qoq

n     EBITDA grew 73.6%qoq to Rs7.07 bn- in line-margins expand  640 bps qoq to 19.1%. EBITDA/t at Rs736 improves 64.2% qoq

n     Cement offtake improves in January – prices hiked Rs10-15/bag. Sustainability of cement price over medium term remains uncertain, as demand yet to see significant pick up

n     Stock trades at PER of 15.3X & EV/ton of USD125 on FY12E-  Do not see valuation comfort, considering uncertainty on sustainability of cement prices & sharp jump in coal prices

Revenues grow 15.6% qoq – led by 9.3% qoq jump in cement realizations

UTCL revenues (Rs37.15bn) grew 15.6% qoq, driven by 9.3% qoq improvement in

blended cement realization at Rs3862/t. Cement volumes at 9.6 mnt grew at a muted

pace of 1.2%yoy and 5.7%qoq due to prolonged monsoons and slower pick up in

infrastructure projects. On a like to like basis , revenues grew by 0.9% yoy.

EBITDA up 73.6%qoq – EBITDA/t at Rs736 up 64.2%qoq

Driven by sharp increase in cement realisations EBITDA for the quarter at Rs7.07bn

grew 73.6% qoq (in line with estimates of Rs6.9bn) with EBITDA margins expanding by

640 bps qoq to 19.1%. On the cost front the only significant increase was visible in

freight cost, which increased 5.9%qoq to Rs757/t on account of increase in rail freight.

Total cost stood at Rs3126/t , a marginal increase of 1.4% sequentially. With improved

realizations and marginal increase in cost, Ultratech reported EBITDA/t of Rs736 (our

estimate of Rs714/t) up 64.2%qoq. Net profit at Rs3.19bn (our estimate of Rs3.24bn)

grew 175.5% qoq . However on a like to like basis , net profit declined by 36.1% yoy.

P&F cost flat QoQ – recent surge in coal prices to be visible in Q4FY11

UTCL’s P&F cost for the quarter at Rs931/t remained flat qoq even though average

international coal prices jumped 18% qoq (Average USD 104/t) and are currently ruling

at USD130/t. We would like to highlight that UTCL has already entered into contract to

import 0.2 mtpa of international coal at USD 124/t for delivery in Q4FY11. Since UTCL

imports 40 % of its coal requirement from international markets, we expect the P&F cost

to increase over next 2-3 quarters.

Aggressive Capex plan to add 9.2 mtpa over next 3 year

UTCL has an ongoing capex plan of Rs100 bn which will be spent over the next 3 years.

These include setting up of additional clinkerisation plants at Chhattisgarh and Karnataka

,along with augmenting grinding capacity, installation of waste heat recovery systems and

setting up of bulk/packaging terminals across locations

Clinkerization plants at Chhattisgarh and Karnataka, will have kiln capacity of 10K tons/day

at each location, entailing new cement capacity additions of 9.2 mtpa at a cost of Rs56 bn

or ~USD135/t. The Chattisgarh plant will have 4 grinding units with aggregate capacity of

4.8 mtpa and a CPP of 45 MW. Whereas Karnataka plant will have 1 split grinding unit of

1.2 mtpa in addition to the mother grinding unit of 3.2 mtpa, along with CPP of 45 MW.

Major equipments for these plants have already been ordered and the construction is

expected to commence in Q4FY11 with expected commissioning by Q1FY14. Consequent

to these additions, Ultratech total cement capacity would stand at ~ 61 mtpa.

Cement prices hiked Rs10-15/bag in January

Helped by improvement in cement offtake and season logistical bottleneck (Wagon

shortage due to diversion of wagons to food grains & other crop) cement prices have

witnessed a hike of Rs10-15/bag across all regions expect Tamilnadu. We do expect

another round of price hike in short term as the industry enters the busy construction

season (January – May).

However valuations still not in comfort zone– Maintain REDUCE

Though cement prices have been hiked across all regions, we continue to believe that

sustainability of cement prices remains uncertain in medium/long term as the cement

demand growth FY11YTD ~5% has now emerged as bigger concern than the overcapacity

in the system. Also as highlighted earlier international coal prices which have jumped to

USD130/t are expected to increase cost pressures and remains key concern for UTCL.

With the stock trading at PER of 15.3X, 8X EV/EBITDA and EV/ton of USD125 on FY12

numbers, we do not see valuation comfort, considering uncertainty on earnings. Maintain

REDUCE.