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We recommend BUY on UltraTech Cement (UCL) on the back
of likely demand revival in the eastern, northern and western
regions (UCL derives 65% of cement volume from these
regions). UCL is the largest cement company in India with a
capacity of 49.5mtpa; its presence is skewed towards regions
that are in a favourable position. UCL has huge spare capacity
in the northern region; improvement in the region’s
utilisation should drive UCL’s volume growth over the next
two years. UCL is trading at an attractive FY13ii EV/Ebitda of
7.5x (bottom-of-the-cycle Ebitda margin).
Favourable markets account for 65% of volume: Post the merger
with Samruddhi Cement (SCL) in July 2010, sales volumes % from the
southern region reduced substantially. In FY11, only 22% of sale
volumes came from the troubled south market and 13% originated
from the central market (where supply will likely outpace demand,
going forward). We expect UCL’s Ebitda margin to expand 200bps in
FY14, thanks to its substantial presence in the northern, western and
eastern regions.
Huge spare capacity in the northern region: UCL’s capacity in the
northern region (post the merger with Samruddhi Cement) is 12.4mtpa
(including Dadri capacity); ~9mtpa has been commissioned in the past
three years. UCL’s volume growth moderated and utilisation of new
capacities was lower, owing to severe competition from Jaiprakash
Associates. In FY11, UCL’s capacities in the northern region operated at
~64% utilisation. We expect volume growth to improve as: i) no
capacities would be added in FY12 in the northern region; and ii) new
capacities that are added in FY13 would record lower production
(unlikely to stabilise before 2HFY13).
Large capex to boost efficiency: UCL has earmarked Rs110bn of
capex for capacity expansion of 9.2mtpa and improvement in
efficiency parameters. Although half of the capex is towards
improving efficiency, there isn’t much clarity on likely benefits. UCL
is confident of generating 16-18% ROE from these investments.
Based on a mismatch in capex guidance and actual spending by the
company over the past two years, we believe that some of this capex
may be delayed.
Valuations attractive; BUY: We expect likely improvement in
pricing power in the eastern, northern and western regions to boost
UCL’s earnings from 2HFY13. We expect the company to be a major
beneficiary of likely improvement in the northern region’s utilisation,
as UCL has excess capacity here; we expect cement volumes from
the northern region to increase on increase in utilisation. However,
earnings may be volatile, owing to exposure to south, where high
prices currently prevail, thanks to pricing discipline in the region. We
have valued the stock at one-year forward rolling EV/Ebitda of 7.5x.
Our revised target price offers 11% upside from the current level.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We recommend BUY on UltraTech Cement (UCL) on the back
of likely demand revival in the eastern, northern and western
regions (UCL derives 65% of cement volume from these
regions). UCL is the largest cement company in India with a
capacity of 49.5mtpa; its presence is skewed towards regions
that are in a favourable position. UCL has huge spare capacity
in the northern region; improvement in the region’s
utilisation should drive UCL’s volume growth over the next
two years. UCL is trading at an attractive FY13ii EV/Ebitda of
7.5x (bottom-of-the-cycle Ebitda margin).
Favourable markets account for 65% of volume: Post the merger
with Samruddhi Cement (SCL) in July 2010, sales volumes % from the
southern region reduced substantially. In FY11, only 22% of sale
volumes came from the troubled south market and 13% originated
from the central market (where supply will likely outpace demand,
going forward). We expect UCL’s Ebitda margin to expand 200bps in
FY14, thanks to its substantial presence in the northern, western and
eastern regions.
Huge spare capacity in the northern region: UCL’s capacity in the
northern region (post the merger with Samruddhi Cement) is 12.4mtpa
(including Dadri capacity); ~9mtpa has been commissioned in the past
three years. UCL’s volume growth moderated and utilisation of new
capacities was lower, owing to severe competition from Jaiprakash
Associates. In FY11, UCL’s capacities in the northern region operated at
~64% utilisation. We expect volume growth to improve as: i) no
capacities would be added in FY12 in the northern region; and ii) new
capacities that are added in FY13 would record lower production
(unlikely to stabilise before 2HFY13).
Large capex to boost efficiency: UCL has earmarked Rs110bn of
capex for capacity expansion of 9.2mtpa and improvement in
efficiency parameters. Although half of the capex is towards
improving efficiency, there isn’t much clarity on likely benefits. UCL
is confident of generating 16-18% ROE from these investments.
Based on a mismatch in capex guidance and actual spending by the
company over the past two years, we believe that some of this capex
may be delayed.
Valuations attractive; BUY: We expect likely improvement in
pricing power in the eastern, northern and western regions to boost
UCL’s earnings from 2HFY13. We expect the company to be a major
beneficiary of likely improvement in the northern region’s utilisation,
as UCL has excess capacity here; we expect cement volumes from
the northern region to increase on increase in utilisation. However,
earnings may be volatile, owing to exposure to south, where high
prices currently prevail, thanks to pricing discipline in the region. We
have valued the stock at one-year forward rolling EV/Ebitda of 7.5x.
Our revised target price offers 11% upside from the current level.
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