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UltraTech Cement Ltd.
More vulnerable than peers
1Q disappoints due to higher costs
UltraTech’s 4Q FY11 (Jan-Mar ’11) EBITDA grew 44% QoQ vs 95% growth for
Ambuja and 172% QoQ growth for ACC. Unlike Ambuja & ACC that posted 7-
10% YoY volume growth, UltraTech posted 5% YoY volume decline. Also, ACC &
Ambuja posted 3-5% QoQ cost reduction while UltraTech’s costs rose (+7% QoQ)
across most line items. Prima facie, we think UltraTech’s relatively large (52% of
volumes) exposure to south-west India remains a key drag on profits.
We expect cement prices to fall; strong opening lifts FY12E
Cement prices eased a tad in April after climbing to historical highs in March 2011
but average prices are still higher than 4Q FY11 levels. This strong (Jan-Apr) start
drives our 20% EBITDA upgrade for FY12E. However, we do not expect current
prices to sustain and believe cement prices could fall dramatically during the
upcoming slack season due to steep excess supply. Maintain underperform
Continued demand weakness could test rational behaviour
Our industry forecast of 9% demand growth for FY12E vs 5% in FY11E seems
optimistic and so far, there are no visible upside catalysts. Despite factoring
demand recovery, we foresee YoY drop in the industry’s capacity utilization. We
share the industry’s concern that continued demand weakness may test rational
behaviour as producers may be reluctant to cut production further
Further capacity announcements on the anvil?
In its press release alongwith FY11/4Q results, UltraTech indicated ~Rs110bn of
capital outlay over next 3 years. So far, the Co has announced expansion plans of
~9.2mn tpa that will cost ~Rs56bn. Thus, it seems likely that the company will
announce further expansion plans.
Price objective basis & risk
UltraTech Cemen (XDJNF)
We have a price objective of Rs750/sh for UltraTech. We value the company at
an EV/capacity of around US$95-$100/ton, based on a 20-25% discount to the
industry's replacement cost of US$125/ton. The trough discount vs. replacement
cost was steeper, at 40-45%, in the previous cycle, but improved RoEs and a
significantly healthier balance sheet may warrant a lower discount in the current
cycle. A 20-25% discount is in line with the average (rather than trough) discount
witnessed through the previous downturn (1997-2002). An unforeseen rise in
energy prices would be an added negative for our outlook. Upside risk to our
outlook would stem from strong and sustained rational pricing behaviour from
cement producers across the industry. A sharp easing in energy prices would
also present upside to our view.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UltraTech Cement Ltd.
More vulnerable than peers
1Q disappoints due to higher costs
UltraTech’s 4Q FY11 (Jan-Mar ’11) EBITDA grew 44% QoQ vs 95% growth for
Ambuja and 172% QoQ growth for ACC. Unlike Ambuja & ACC that posted 7-
10% YoY volume growth, UltraTech posted 5% YoY volume decline. Also, ACC &
Ambuja posted 3-5% QoQ cost reduction while UltraTech’s costs rose (+7% QoQ)
across most line items. Prima facie, we think UltraTech’s relatively large (52% of
volumes) exposure to south-west India remains a key drag on profits.
We expect cement prices to fall; strong opening lifts FY12E
Cement prices eased a tad in April after climbing to historical highs in March 2011
but average prices are still higher than 4Q FY11 levels. This strong (Jan-Apr) start
drives our 20% EBITDA upgrade for FY12E. However, we do not expect current
prices to sustain and believe cement prices could fall dramatically during the
upcoming slack season due to steep excess supply. Maintain underperform
Continued demand weakness could test rational behaviour
Our industry forecast of 9% demand growth for FY12E vs 5% in FY11E seems
optimistic and so far, there are no visible upside catalysts. Despite factoring
demand recovery, we foresee YoY drop in the industry’s capacity utilization. We
share the industry’s concern that continued demand weakness may test rational
behaviour as producers may be reluctant to cut production further
Further capacity announcements on the anvil?
In its press release alongwith FY11/4Q results, UltraTech indicated ~Rs110bn of
capital outlay over next 3 years. So far, the Co has announced expansion plans of
~9.2mn tpa that will cost ~Rs56bn. Thus, it seems likely that the company will
announce further expansion plans.
Price objective basis & risk
UltraTech Cemen (XDJNF)
We have a price objective of Rs750/sh for UltraTech. We value the company at
an EV/capacity of around US$95-$100/ton, based on a 20-25% discount to the
industry's replacement cost of US$125/ton. The trough discount vs. replacement
cost was steeper, at 40-45%, in the previous cycle, but improved RoEs and a
significantly healthier balance sheet may warrant a lower discount in the current
cycle. A 20-25% discount is in line with the average (rather than trough) discount
witnessed through the previous downturn (1997-2002). An unforeseen rise in
energy prices would be an added negative for our outlook. Upside risk to our
outlook would stem from strong and sustained rational pricing behaviour from
cement producers across the industry. A sharp easing in energy prices would
also present upside to our view.
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