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UltraTech Cement
Comment from RBS India Access
UltraTech management presented at RBS's India Access Conference in Mumbai.
The key take away's are 1) it expects over-supply conditions to persist for next
24 months; 2) demand growth is expected to improve from 5.5% in FY11 to 8% in
FY12; 3) confident of passing on recent cost escalations of Rs7-7.5/bag.
UltraTech management optimistic on demand recovery in FY12
! FY11 demand growth based on trends so far would be 5.5%, clearly lower than earlier
anticipated. 14 states in India account for 80% of cement demand, but in FY11, five of those
14 states recorded negative demand growth. The largest of them was Andhra Pradesh, where
ongoing political uncertainty was the primary reason. The delayed monsoon had also
impacted cement demand in Fy11. Management felt that April- June 2011, would continue to
see sluggish demand in states like Tamil Nadu, Kerela, Pondicherry which are going to
elections. However, management is confident of FY11 recording a 8% demand growth, as
overall economic growth of 8-9% would sustain cement demand. East, North India and states
like Gujarat, Maharashtra would be key drivers of cement growth.
Surplus conditions to persist for the next 2 years
! The India Cement Industry would end FY11 with a cement capacity of 301mmt as compared
to a cement sales of 213.5mmt. Management expects 25mmt of cement capacity to be added
over the next three years by all overall industry. Hence, based on its calculations, industry
would be operating at a capacity utilisation of 73-79% over the next two years. The share of
the top five players is currently 55%, and this would move up marginally over the next two
years. Management believes industry would behave rationally, and would not indulge in price
war, as most of new capacities would require a EBITDA/mt of atleast Rs800-900/mt to justify
investments.
Cost pressures and UltraTech's growth plans
! UltraTech sources only 35% of its coal from Coal India, hence would face the least cost
escalation when compared to other industry players. The management estimates the cost
escalation from the recent coal price increase would be Rs3/bag. Besides, the excise duty
structure change would result in incremental excise duty of Rs2-2.5/bag. As per management
the increase in excise duty would impact only the " trade segment" which accounts for 70% of
its overall sales volumes. The railway freight increase prior to the budget would increase
costs by around Rs1/bag. The total cost escalation of around Rs7/bag, is expected to passed
on by price hikes. UltraTech has embarked on capex of Rs56bn over the next two years to
increase its cement capacity by 9.2mmt. It is setting up capacities in 2 locations - Karnataka
and Chattisgarh, and expects to commission the same by end of FY13. It has already ordered
the cement equipment, and would be starting civil construction in the site in 2 months. As
regards, the captive coal blocks it was awarded, it stated that one of coal block is in the " nogo"
zone, so no progress is expected soon, but it expects the other coal block to start
production in the next 18 months. It would be capable of sourcing 0.5mmt of coal from the
block, which is equivalent to 7% of its current coal requirement.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UltraTech Cement
Comment from RBS India Access
UltraTech management presented at RBS's India Access Conference in Mumbai.
The key take away's are 1) it expects over-supply conditions to persist for next
24 months; 2) demand growth is expected to improve from 5.5% in FY11 to 8% in
FY12; 3) confident of passing on recent cost escalations of Rs7-7.5/bag.
UltraTech management optimistic on demand recovery in FY12
! FY11 demand growth based on trends so far would be 5.5%, clearly lower than earlier
anticipated. 14 states in India account for 80% of cement demand, but in FY11, five of those
14 states recorded negative demand growth. The largest of them was Andhra Pradesh, where
ongoing political uncertainty was the primary reason. The delayed monsoon had also
impacted cement demand in Fy11. Management felt that April- June 2011, would continue to
see sluggish demand in states like Tamil Nadu, Kerela, Pondicherry which are going to
elections. However, management is confident of FY11 recording a 8% demand growth, as
overall economic growth of 8-9% would sustain cement demand. East, North India and states
like Gujarat, Maharashtra would be key drivers of cement growth.
Surplus conditions to persist for the next 2 years
! The India Cement Industry would end FY11 with a cement capacity of 301mmt as compared
to a cement sales of 213.5mmt. Management expects 25mmt of cement capacity to be added
over the next three years by all overall industry. Hence, based on its calculations, industry
would be operating at a capacity utilisation of 73-79% over the next two years. The share of
the top five players is currently 55%, and this would move up marginally over the next two
years. Management believes industry would behave rationally, and would not indulge in price
war, as most of new capacities would require a EBITDA/mt of atleast Rs800-900/mt to justify
investments.
Cost pressures and UltraTech's growth plans
! UltraTech sources only 35% of its coal from Coal India, hence would face the least cost
escalation when compared to other industry players. The management estimates the cost
escalation from the recent coal price increase would be Rs3/bag. Besides, the excise duty
structure change would result in incremental excise duty of Rs2-2.5/bag. As per management
the increase in excise duty would impact only the " trade segment" which accounts for 70% of
its overall sales volumes. The railway freight increase prior to the budget would increase
costs by around Rs1/bag. The total cost escalation of around Rs7/bag, is expected to passed
on by price hikes. UltraTech has embarked on capex of Rs56bn over the next two years to
increase its cement capacity by 9.2mmt. It is setting up capacities in 2 locations - Karnataka
and Chattisgarh, and expects to commission the same by end of FY13. It has already ordered
the cement equipment, and would be starting civil construction in the site in 2 months. As
regards, the captive coal blocks it was awarded, it stated that one of coal block is in the " nogo"
zone, so no progress is expected soon, but it expects the other coal block to start
production in the next 18 months. It would be capable of sourcing 0.5mmt of coal from the
block, which is equivalent to 7% of its current coal requirement.
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