Ultratech Cements -Best placed to grow but at a price:: Macquarie Research,

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Ultratech Cements
Best placed to grow but at a price
Event
 4QFY11 results well above estimates: Ultratech cements reported 4QFY11
results that were higher than our estimate due to higher volume and some
one offs. We are increasing our estimates for UTCEM (14% and 18%) to
reflect a better pricing outlook. We have increased our target price to Rs870
from Rs818 earlier. Maintain Underperform.

Impact
 4QFY11 results – recovery in numbers: Ultratech reported net sales at
Rs44.9bn, up 21% QoQ as sales volume was up 6% and realization up by
14%. The company reported EBITDA Rs10.2bn or Rs985 per ton. Net profit
was at Rs7.26bn as compared to Rs3.2bn reported last quarter.
 Cement price increase extraordinary but not sustainable: The cement price
in 1QCY11 is up Rs400/t over last quarter. Prices as of early April are another
Rs320/t higher over the 1QCY11 average. All India prices now average at an
all-time high of Rs277/bag! We are hearing that demand is really struggling now
and already some price correction has started. We believe the trend will remain
downwards over next 4-6 months as we enter the seasonally weak season.
 Margins to decline faster as costs rise: We expect an increase in coal prices
by Coal India to impact costs by around Rs90-100/t. Also, we expect an
increase in diesel prices around late May’11 which would push up freight costs.
Also, as we enter the lean season, lower volumes will likely make costs look
even higher during the next two quarters. For UTCEM, we are building in
EBITDA per ton of Rs868 for FY12 as compared to Rs985 reported this quarter.
 Capacity expansion continues: The company is working on expanding
capacity by 20% over the next three years to maintain its market share. It is
also spending on building logistics infrastructure which will improve its
competitive advantage further. Overall looking to spend US$2.4bn over a 3-
year period.
Earnings and target price revision
 We have changed our estimates by 14% and 18% for FY12 and FY13,
respectively and have introduced estimates for FY14.
Price catalyst
 12-month price target: Rs870.00 based on a DCF methodology.
 Catalyst: Fall in cement prices
Action and recommendation
 Maintain Underperform: Among large cement companies, Ultratech seems
best placed to grow organically and should be able to beat industry growth
rates. Ultratech is our preferred exposure for the cement sector, but we would
wait for a correction in cement prices and consequently stock price to enter
here.