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UltraTech Cement (UTCEM)
Cement
Looking beyond the short-term pain. We reiterate our positive stance on UltraTech
(UTCEM) noting (1) potential revival of cement cycle going into FY2013E and (2)
relatively attractive valuations of UTCEM compared to peers. UTCEM is currently trading
at EV/ton of US$119/ton (16% discount to ACEM and 4% discount to ACC) on
FY2013E capacity and EV/EBTDA of 6X (9% discount to ACEM and 14% discount to
ACC) on FY2013E EBITDA. Reiterate BUY with a target price of Rs1,220/share.
Demand environment looks challenging in the near term though FY2013E could be a lot better
Lower capacity addition in FY2013E and a potential revival in demand could see utilization rates
bottoming out in FY2012E and gradual improvement from FY2013E and beyond (see Exhibit 1).
We do concede that UTCEM’s key market of South India (~25% of sales) remains the worstaffected
though highlight the strong pricing discipline maintained by market participants as
discussed in the subsequent section. Challenging operating environment driven by (1) subdued
demand and (2) unrelenting cost inflation continues to plague cement manufactures in India. We
estimate an effective capacity addition of 28 mtpa in FY2012E and note that in absence of
corresponding volume growth, utilization levels could drop to 74% in FY2012E as against 78% in
FY2011.
Strong pricing discipline allows for prices to remain firm even in monsoon months
We are encouraged by the strong pricing discipline maintained by the industry participants that
has allowed for cement prices to remain firm even in the monsoon months barring few pockets of
West and East India. The discipline is strongest in South India (~25% of sales) where average
cement prices continue to be at ~Rs285/bag levels and have sustained these levels for the past 11
months despite below-industry utilization levels of 65%. We note that pressures from incremental
capacity addition will likely recede as capacity addition over the next three years is a meager 57
mtpa against 95 mtpa added over the past three, which if coupled with a revival of demand could
allow for sustenance of the current market discipline.
Reiterate BUY on attractive valuations relative to peers
We reiterate our BUY rating on UTCEM with a target price of Rs1,220/share. UTCEM is currently
trading at EV/ton of US$119/ton (16% discount to ACEM and 4% discount to ACC) on FY2013E
capacity and EV/EBTDA of 6X (9% discount to ACEM and 14% discount to ACC) on FY2013E
EBITDA. Demand weakness notwithstanding, UTCEM with its regionally diversified presence and
relatively attractive valuations remains one of our preferred picks in the sector.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UltraTech Cement (UTCEM)
Cement
Looking beyond the short-term pain. We reiterate our positive stance on UltraTech
(UTCEM) noting (1) potential revival of cement cycle going into FY2013E and (2)
relatively attractive valuations of UTCEM compared to peers. UTCEM is currently trading
at EV/ton of US$119/ton (16% discount to ACEM and 4% discount to ACC) on
FY2013E capacity and EV/EBTDA of 6X (9% discount to ACEM and 14% discount to
ACC) on FY2013E EBITDA. Reiterate BUY with a target price of Rs1,220/share.
Demand environment looks challenging in the near term though FY2013E could be a lot better
Lower capacity addition in FY2013E and a potential revival in demand could see utilization rates
bottoming out in FY2012E and gradual improvement from FY2013E and beyond (see Exhibit 1).
We do concede that UTCEM’s key market of South India (~25% of sales) remains the worstaffected
though highlight the strong pricing discipline maintained by market participants as
discussed in the subsequent section. Challenging operating environment driven by (1) subdued
demand and (2) unrelenting cost inflation continues to plague cement manufactures in India. We
estimate an effective capacity addition of 28 mtpa in FY2012E and note that in absence of
corresponding volume growth, utilization levels could drop to 74% in FY2012E as against 78% in
FY2011.
Strong pricing discipline allows for prices to remain firm even in monsoon months
We are encouraged by the strong pricing discipline maintained by the industry participants that
has allowed for cement prices to remain firm even in the monsoon months barring few pockets of
West and East India. The discipline is strongest in South India (~25% of sales) where average
cement prices continue to be at ~Rs285/bag levels and have sustained these levels for the past 11
months despite below-industry utilization levels of 65%. We note that pressures from incremental
capacity addition will likely recede as capacity addition over the next three years is a meager 57
mtpa against 95 mtpa added over the past three, which if coupled with a revival of demand could
allow for sustenance of the current market discipline.
Reiterate BUY on attractive valuations relative to peers
We reiterate our BUY rating on UTCEM with a target price of Rs1,220/share. UTCEM is currently
trading at EV/ton of US$119/ton (16% discount to ACEM and 4% discount to ACC) on FY2013E
capacity and EV/EBTDA of 6X (9% discount to ACEM and 14% discount to ACC) on FY2013E
EBITDA. Demand weakness notwithstanding, UTCEM with its regionally diversified presence and
relatively attractive valuations remains one of our preferred picks in the sector.
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