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UltraTech Cement: Investing for future; upgrade to Buy
Volume growth
We expect volume growth to improve to
12.2% CAGR over FY11-13 as against 6.7%
CAGR over FY09-11.
Volume growth would be driven by ramp-up
at the 15m-ton new capacities, which would
be sufficient to drive growth over the next two
years.
However, in its cash cow business of white
cement, UltraTech is operating at peak
capacity and is likely to grow at just 3.7%
CAGR (FY11-13E).
Market mix
UltraTech is a pan-India play without
concentration in any particular region,
insulating it from wide variation in regional
demand and price volatility.
Incremental volumes would be driven by the
North and the South.
Its product mix is likely to improve, with lower
contribution from clinker, as the new grinding
unit in Gujarat commissions operations in
FY12.
We expect UltraTech's 4QFY11 realization to
improve by Rs15/bag QoQ.
Cost and profitability
UltraTech has a well-diversified fuel mix, with
just ~53% dependence on domestic coal. We
estimate ~Rs2.5/bag increase in cost due
to increase in domestic coal prices by Coal
India.
Full benefit of doubling of captive power plant
to 80% dependence has been realized and
is reflecting in FY11 performance.
We expect EBITDA/ton to improve by Rs290
QoQ in 4QFY11 to Rs1,004 and by Rs80 in
FY12 to Rs869.
Valuation and view
The recent acquisition of Star Cement (UAE)
would put pressure on operating performance
in the short run.
Ongoing capex plans of Rs102b over the next
3-4 years would restrict free cash flow
generation.
The stock is valued at 15.2x FY12E EPS,
and an EV of 7.8x FY12E EBITDA and
US$129/ton (~51m-ton capacity). Upgrade to
Buy with a target price of Rs1,371 (~10x
FY12E EV/EBITDA).
UltraTech Cement: Investing for future; upgrade to Buy
Capacity in place for volume growth: We
estimate volume growth to improve to 12.2%
CAGR over FY11-13E, as against 6.7% CAGR
over FY09-11E. Volume growth would be driven
by ramp-up at 15mt new capacities, which
would be sufficient to drive growth over next 2
years. However, in its cash cow business of
White cement it is operating at peak capacity
and as result it is estimated to grow at 3.7%
CAGR (FY11-13E).
Product mix to improve as clinker sale
reduces: While incremental volumes are
expected to be driven from North and South,
we don't estimate any meaningful shift in its
market mix. However, its product mix is
expected to improve with lower contribution
from clinker as new grinding unit at Gujarat
commissions operations by FY12. We expect
its 4QFY11 realizations to improve by Rs15/bag
QoQ.
Well-diversified fuel mix: UltraTech has well
diversified fuel mix, with only ~53% dependence
on domestic coal (~33% linkage coal). Apart
from domestic coal, it uses imported coal
(~33%) and pet-coke (~14%). We estimate
~Rs2.5/bag increase in cost due to increase in
domestic coal prices by Coal India.
UltraTech Cement: Challenges ahead
Net debt to reduce gradually (Rs b)
Mega capex plan of Rs102b over next 3-4
years to curtail free cash flow generation:
UltraTech has capex plans of Rs102b over the
next 3-4 years. It is setting up a Rs56b, 9.2mton
brownfield capacity, commence operations
by 4QFY13. Further, it is investing Rs45.6b in
adding CPPs, adding supporting infrastructure
and on modernization and upgradation.
Star Cement (UAE) to be a drag: In
September 2010, it completed its acquisition of
Star Cement, a 3m-ton UAE-based cement
company. It reported volumes of 0.75m tons,
EBITDA of ~Rs75m (~Rs100/ton) and net loss
of Rs270m in 3QFY11. Star Cement is likely to
be a drag in the short run. Our estimates are
yet to factor in Star Cement.
Auxiliary businesses to support
profitability: Its auxiliary businesses (~15% of
FY11E revenue) like white cement, wall care
putty and nascent RMC business are scaling
up well. As these businesses scale up, they will
support profitability - these niche businesses
(except RMC) enjoy good margins and are noncyclical.
However, its white cement business is
operating at ~90% utilization and its has no plans
to add further capacity. We expect white
cement volumes to grow at just 3.7% CAGR
UltraTech Cement: Valuation and view
UltraTech’s EV/EBITDA chart
UltraTech, with its 50m-ton capacity and pan-
India presence, is one of the best proxies for
the Indian cement industry.
However, the recent acquisition of Star Cement
(UAE) would put pressure on operating
performance in the short run.
Further, ongoing capex plans of Rs102b over
the next 3-4 years would restrict free cash flow
generation.
The stock is valued at 15.2x FY12E EPS, and
an EV of 7.8x FY12E EBITDA and US$129/
ton (~51m-ton capacity). Upgrade to Buy with
a target price of Rs1,371 (~10x FY12E EV/
EBITDA).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UltraTech Cement: Investing for future; upgrade to Buy
Volume growth
We expect volume growth to improve to
12.2% CAGR over FY11-13 as against 6.7%
CAGR over FY09-11.
Volume growth would be driven by ramp-up
at the 15m-ton new capacities, which would
be sufficient to drive growth over the next two
years.
However, in its cash cow business of white
cement, UltraTech is operating at peak
capacity and is likely to grow at just 3.7%
CAGR (FY11-13E).
Market mix
UltraTech is a pan-India play without
concentration in any particular region,
insulating it from wide variation in regional
demand and price volatility.
Incremental volumes would be driven by the
North and the South.
Its product mix is likely to improve, with lower
contribution from clinker, as the new grinding
unit in Gujarat commissions operations in
FY12.
We expect UltraTech's 4QFY11 realization to
improve by Rs15/bag QoQ.
Cost and profitability
UltraTech has a well-diversified fuel mix, with
just ~53% dependence on domestic coal. We
estimate ~Rs2.5/bag increase in cost due
to increase in domestic coal prices by Coal
India.
Full benefit of doubling of captive power plant
to 80% dependence has been realized and
is reflecting in FY11 performance.
We expect EBITDA/ton to improve by Rs290
QoQ in 4QFY11 to Rs1,004 and by Rs80 in
FY12 to Rs869.
Valuation and view
The recent acquisition of Star Cement (UAE)
would put pressure on operating performance
in the short run.
Ongoing capex plans of Rs102b over the next
3-4 years would restrict free cash flow
generation.
The stock is valued at 15.2x FY12E EPS,
and an EV of 7.8x FY12E EBITDA and
US$129/ton (~51m-ton capacity). Upgrade to
Buy with a target price of Rs1,371 (~10x
FY12E EV/EBITDA).
UltraTech Cement: Investing for future; upgrade to Buy
Capacity in place for volume growth: We
estimate volume growth to improve to 12.2%
CAGR over FY11-13E, as against 6.7% CAGR
over FY09-11E. Volume growth would be driven
by ramp-up at 15mt new capacities, which
would be sufficient to drive growth over next 2
years. However, in its cash cow business of
White cement it is operating at peak capacity
and as result it is estimated to grow at 3.7%
CAGR (FY11-13E).
Product mix to improve as clinker sale
reduces: While incremental volumes are
expected to be driven from North and South,
we don't estimate any meaningful shift in its
market mix. However, its product mix is
expected to improve with lower contribution
from clinker as new grinding unit at Gujarat
commissions operations by FY12. We expect
its 4QFY11 realizations to improve by Rs15/bag
QoQ.
Well-diversified fuel mix: UltraTech has well
diversified fuel mix, with only ~53% dependence
on domestic coal (~33% linkage coal). Apart
from domestic coal, it uses imported coal
(~33%) and pet-coke (~14%). We estimate
~Rs2.5/bag increase in cost due to increase in
domestic coal prices by Coal India.
UltraTech Cement: Challenges ahead
Net debt to reduce gradually (Rs b)
Mega capex plan of Rs102b over next 3-4
years to curtail free cash flow generation:
UltraTech has capex plans of Rs102b over the
next 3-4 years. It is setting up a Rs56b, 9.2mton
brownfield capacity, commence operations
by 4QFY13. Further, it is investing Rs45.6b in
adding CPPs, adding supporting infrastructure
and on modernization and upgradation.
Star Cement (UAE) to be a drag: In
September 2010, it completed its acquisition of
Star Cement, a 3m-ton UAE-based cement
company. It reported volumes of 0.75m tons,
EBITDA of ~Rs75m (~Rs100/ton) and net loss
of Rs270m in 3QFY11. Star Cement is likely to
be a drag in the short run. Our estimates are
yet to factor in Star Cement.
Auxiliary businesses to support
profitability: Its auxiliary businesses (~15% of
FY11E revenue) like white cement, wall care
putty and nascent RMC business are scaling
up well. As these businesses scale up, they will
support profitability - these niche businesses
(except RMC) enjoy good margins and are noncyclical.
However, its white cement business is
operating at ~90% utilization and its has no plans
to add further capacity. We expect white
cement volumes to grow at just 3.7% CAGR
UltraTech Cement: Valuation and view
UltraTech’s EV/EBITDA chart
UltraTech, with its 50m-ton capacity and pan-
India presence, is one of the best proxies for
the Indian cement industry.
However, the recent acquisition of Star Cement
(UAE) would put pressure on operating
performance in the short run.
Further, ongoing capex plans of Rs102b over
the next 3-4 years would restrict free cash flow
generation.
The stock is valued at 15.2x FY12E EPS, and
an EV of 7.8x FY12E EBITDA and US$129/
ton (~51m-ton capacity). Upgrade to Buy with
a target price of Rs1,371 (~10x FY12E EV/
EBITDA).
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