Ultratech Cement: largest cement player in the country • Daiwa

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Initiation: largest cement player
in the country
• Merger with Samruddhi Cement has improved the regional mix
• EV/EBITDA discount to ACC and Ambuja set to narrow post the
merger
• New capex should result in greater operational efficiencies

􀂃 What's new
We expect Ultratech’s EV/EBITDA
discount to peers ACC and Ambuja to
narrow following its recent merger,
with its newly acquired pan-India
presence and likelihood of greater cost
efficiencies going forward.
􀂃 What's the impact
Post the merger with Grasim
Industries’ cement division,
Samruddhi Cement, in July 2010,
Ultratech has emerged as the largest
cement-manufacturing company in
India, with installed capacity of
48.8mt, almost double that of ACC
and Ambuja, and captive power
capacity of 504MW, which fulfils
around 80% of its power
requirements. The merger has also
corrected the regional skew of
Ultratech’s capacity. Post the merger,
the company now has a pan-India
presence with an all-India market
share of 19%, thereby eliminating
the regional risk. It is also focusing
on improving its operational
efficiencies through increased use of
CPPs, increasing the blended
clinker/cement ratio, and improving
its logistics infrastructure. Further,
it plans to invest Rs14bn in logistics
infrastructure and bulk-packaging
terminals, which should lead to
operational efficiencies near term.
The company is also planning 9mt of
capacity additions at its
Chhattisgarh and Karnataka plants
via brownfield expansion at a cost of
Rs56bn (including a CPP) over the
next three years. A significant
presence in the south of India (25%
of capacity) and increase in capex
could lead to lower free cash flow
vis-à-vis its peers, which could be a
risk going forward.
􀂃 What we recommend
We initiate coverage with a Buy (1)
rating and six-month target price of
Rs1,345, based on an 8.5x FY13E
EV/EBITDA multiple. Ultratech has
always traded at a EV/EBITDA
discount to ACC and Ambuja due to
its unbalanced regional mix and
higher dependence on expensive
sources of power. However, following
the merger, we expect this discount to
narrow, on the back of its new pan-
India presence and higher usage of
captive power. The stock is trading
currently at a PER of 15.5x and an
EV/EBITDA multiple of 8.2x for
FY12E, and at an EV/t of US$134
based on its capacity of 49m tpa.
􀂃 How we differ
Our FY12 and FY13 EBITDA
forecasts are 1.0% and 5.4% higher
than those of the Bloomberg
consensus. We forecast cement
prices to rise by 8% YoY and 5% YoY
for 2011 and 2012, which are higher
than the consensus forecasts.