UltraTech Cement- In-line performance, 4Q to be better; Buy : Anand Rathi

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UltraTech Cement
In-line performance, 4Q to be better; maintain Buy
3QFY11 PAT was in line with our estimates. Rise in realization and
volume boosted profitability qoq. We expect this to continue in
4QFY11. We introduce fresh estimates, based on the merger with
Samruddhi Cement, as well as FY13 estimates. We also revise our
target price to `1,235 from `1,255 earlier. Maintain Buy.

 Realization improves. At `3,736/ton, blended realization improved
7% qoq. Grey cement realization improved 9% qoq to `3,244/ton (vs.
`2,980), which was more than industry average due to high exposure to
the southern region (30% post-merger), where prices had risen the
most during the quarter. Cement aggregate volume was 9.9m tons,
including 0.14m tons of white cement and 0.46m tons of clinker sales.
 EBITDA/ton (blended) rose to ~`710 (vs. `440 qoq) led by 7%
realization growth. Variable costs such as raw material and power &
fuel saw moderate savings. Management expects pricing and rising
energy costs (greater reliance on imports) to be near-term challenges.
Despite the rise in costs, management expects 4QFY11 margin to
improve qoq on the back of better realization and higher volume.
 Expansion and outlook. Capex of `100bn has been planned over
FY11-14, including setting up 9.2m-ton capacity. Environmental
clearance is awaited, after which orders for equipment would be placed.
Management expects cement demand to grow 8-10% from FY12.
 Valuation and risks. At our target price of `1,235, the stock trades at
7.5x FY12e EV/EBITDA. It implies PE of 14.2x and EV/ton of
US$160. Key risk: Weakening of cement prices.