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UltraTech Cement
Cement
Looking for volume growth. Ultratech Cement (UTCEM) reported improved
profitability (qoq), aided by a revival of prices in its key markets of South. However,
sedate volume growth continues to raise questions on the sustenance of the current
price levels (and profitability). We maintain our Cautious stance and revise earnings to
reflect the moderation in cement despatches, and remain watchful of the demand
environment, which could further weigh on industry utilizations
Results ahead of estimate on account of lower overhead cost
UTCEM reported standalone revenues of Rs37 bn (2.2% yoy, 16% qoq), operating profits of Rs7
bn (-31% yoy, 74% qoq) and net income of Rs3.2 bn (176% qoq) against our estimate of Rs37
bn, Rs6.5 bn and Rs2.9 bn, respectively. We note that all comparisons are on a like-for-like basis
(post-merger).
Volumes at 9.8 mn tons (0.1% yoy, 7.7% qoq) were in line with our estimates while average
realizations at Rs3,791/ton were marginally lower than our estimate of Rs3,808/ton. Higher-thanestimated
EBITDA was primarily on account of (1) lower overhead expenses of Rs6.8 bn against
our estimate of Rs7.3 bn, and (2) lower power and fuel cost (Rs914/ton against our estimate of
Rs950/ton) yielding a profitability of Rs722/ton against our estimate of Rs668/ton. Operating
margins improved to 19.1% in 3QFY11 from 12.7% in 2QFY11, primarily driven by improved
pricing environment.
Pricing improves as South leads the way though absence of volume growth a matter of concern
Cement prices saw a healthy revival in 3QFY11 with all-India average cement prices increasing by
~Rs20/bag during 3QFY11E, contributed largely by South where cement prices increased by
Rs42/bag in October 2010. The spike in South India prices resulted in a 7% sequential
improvement in UTCEM’s realizations. However, we remain skeptical on the sustenance of current
prices given the worsening demand-supply situation in the absence of consumption growth.
Cement volumes continue to remain muted with industry sales in November registering a decline
(6% yoy). In our view, subdued demand along with supply overhang will likely pull down the
prices from current levels.
Maintain REDUCE with a revised target price of Rs1,030/share
We maintain our REDUCE rating on UTCEM with a revised target price of Rs1,030/share as we
adjust for lower volumes. Our target price implies an EV/EBITDA of 6.3X on FY2012E EBITDA and
EV/ton of US$131/ton on FY2012E production. We have revised our EPS estimate to Rs42/share
(previously Rs54/share) in FY2011E and to Rs80/share (previously Rs93/share) in FY2012E taking
cognizance of lower cement offtake.
Detailed analysis of quarterly results
We discuss below some key highlights of 3QFY11 results. We note that all yearly
comparisons are on a like-for-like basis by consolidating Grasim’s standalone cement results
for 3QFY10.
Volumes: Total volumes remained flat yoy at 9.8 mn tons in 3QFY11 (0.1% yoy, 7%
qoq). Subdued sequential growth is indicative of general industry weakness in cement
offtake.
Realization: Blended realizations increased to Rs3,791/ton in 3QFY11 (2.1% yoy, 7%
qoq) driven by strong sequential revival in South India which saw prices increasing by
~Rs40/bag in October. Also, cement prices in West India improved by Rs10-15/bag in
November giving further fillip to realizations.
Power and fuel cost: UTCEM’s power and fuel cost decreased from Rs927/ton in
2QFY11 to Rs914/ton in 3QFY11. We note that due to an average 1-2 months of coal
inventory and an additional lag between contract and delivery of imported coal, increase
in coal prices affects the income statement with a 3-6 month lag and expect a more
pronounced effect of surging coal prices over the next few quarters.
Freight cost: Freight cost increased from Rs715/ton in 2QFY11 to Rs743/ton in 3QFY11
reflecting the increased freight during the quarter driven by hike in fuel prices.
Raw material cost: Raw material cost remained stable at Rs496/ton.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
UltraTech Cement
Cement
Looking for volume growth. Ultratech Cement (UTCEM) reported improved
profitability (qoq), aided by a revival of prices in its key markets of South. However,
sedate volume growth continues to raise questions on the sustenance of the current
price levels (and profitability). We maintain our Cautious stance and revise earnings to
reflect the moderation in cement despatches, and remain watchful of the demand
environment, which could further weigh on industry utilizations
Results ahead of estimate on account of lower overhead cost
UTCEM reported standalone revenues of Rs37 bn (2.2% yoy, 16% qoq), operating profits of Rs7
bn (-31% yoy, 74% qoq) and net income of Rs3.2 bn (176% qoq) against our estimate of Rs37
bn, Rs6.5 bn and Rs2.9 bn, respectively. We note that all comparisons are on a like-for-like basis
(post-merger).
Volumes at 9.8 mn tons (0.1% yoy, 7.7% qoq) were in line with our estimates while average
realizations at Rs3,791/ton were marginally lower than our estimate of Rs3,808/ton. Higher-thanestimated
EBITDA was primarily on account of (1) lower overhead expenses of Rs6.8 bn against
our estimate of Rs7.3 bn, and (2) lower power and fuel cost (Rs914/ton against our estimate of
Rs950/ton) yielding a profitability of Rs722/ton against our estimate of Rs668/ton. Operating
margins improved to 19.1% in 3QFY11 from 12.7% in 2QFY11, primarily driven by improved
pricing environment.
Pricing improves as South leads the way though absence of volume growth a matter of concern
Cement prices saw a healthy revival in 3QFY11 with all-India average cement prices increasing by
~Rs20/bag during 3QFY11E, contributed largely by South where cement prices increased by
Rs42/bag in October 2010. The spike in South India prices resulted in a 7% sequential
improvement in UTCEM’s realizations. However, we remain skeptical on the sustenance of current
prices given the worsening demand-supply situation in the absence of consumption growth.
Cement volumes continue to remain muted with industry sales in November registering a decline
(6% yoy). In our view, subdued demand along with supply overhang will likely pull down the
prices from current levels.
Maintain REDUCE with a revised target price of Rs1,030/share
We maintain our REDUCE rating on UTCEM with a revised target price of Rs1,030/share as we
adjust for lower volumes. Our target price implies an EV/EBITDA of 6.3X on FY2012E EBITDA and
EV/ton of US$131/ton on FY2012E production. We have revised our EPS estimate to Rs42/share
(previously Rs54/share) in FY2011E and to Rs80/share (previously Rs93/share) in FY2012E taking
cognizance of lower cement offtake.
Detailed analysis of quarterly results
We discuss below some key highlights of 3QFY11 results. We note that all yearly
comparisons are on a like-for-like basis by consolidating Grasim’s standalone cement results
for 3QFY10.
Volumes: Total volumes remained flat yoy at 9.8 mn tons in 3QFY11 (0.1% yoy, 7%
qoq). Subdued sequential growth is indicative of general industry weakness in cement
offtake.
Realization: Blended realizations increased to Rs3,791/ton in 3QFY11 (2.1% yoy, 7%
qoq) driven by strong sequential revival in South India which saw prices increasing by
~Rs40/bag in October. Also, cement prices in West India improved by Rs10-15/bag in
November giving further fillip to realizations.
Power and fuel cost: UTCEM’s power and fuel cost decreased from Rs927/ton in
2QFY11 to Rs914/ton in 3QFY11. We note that due to an average 1-2 months of coal
inventory and an additional lag between contract and delivery of imported coal, increase
in coal prices affects the income statement with a 3-6 month lag and expect a more
pronounced effect of surging coal prices over the next few quarters.
Freight cost: Freight cost increased from Rs715/ton in 2QFY11 to Rs743/ton in 3QFY11
reflecting the increased freight during the quarter driven by hike in fuel prices.
Raw material cost: Raw material cost remained stable at Rs496/ton.
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