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Ultratech Cements
Cost attack
Event
2QFY12 results well below estimates: Ultratech Cements reported 2QFY12
results 21% below our estimate because of sharper-than-anticipated rises in
freight and repair costs. Cement prices have moved up again, driven by
supply discipline, giving a false sense of security, but the chances of penalties
being imposed by the Competition Commission of India (CCI) have also risen
and they could come as a shock. We retain our Underperform and
recommend selling into rallies.
Impact
Strong 2QFY12 results due to low base: Ultratech reported net sales of
Rs39.1bn, up 22% YoY as realisations rose by 22% and volumes stayed flat.
The company reported EBITDA of Rs5.8bn, or Rs639 per ton vs Rs448/t last
year. Net profit at Rs2.8bn compared to Rs1.2bn last year.
Cement price recovery should help margins: Cement prices have
increased by around Rs20-25/bag over the average Q2 price and should help
3Q margins recover. We expect a minor reduction in costs as repair
maintenance costs of about Rs130/t and a freight cost increase of Rs100/t
partly due to one-off shifting of clinker within facilities were specific to Q2.
However, this will likely be partially offset by higher costs due to increases in
rail freight and lower availability of coal from Coal India.
But already in our estimates: We are building in margin of Rs934/t for FY12
and volume of 43mt. To achieve this, we expect UTCEM to show EBITDA/t of
Rs934/t and volume 24mt in the second half of FY12. In case of a volume
shortfall by 1mt, required EBITDA/t will increase to Rs975/t.
Current costs understated: Given the lower production levels, UTCEM has
optimised its operations. This has reduced the fixed costs to lower than
normalised levels to an extent, though variable costs have been impacted by
increases in coal and diesel prices. As the company increases production, this
advantage might erode.
Earnings and target price revision
No change.
Price catalyst
12-month price target: Rs740.00 based on a DCF methodology.
Catalyst: Fall in cement prices.
Action and recommendation
Maintain Underperform: The Indian cement industry is experiencing huge
oversupply, and low demand growth. However, profitability has been
maintained at higher than originally expected levels, and hence this has
reflected in stock price performances. From here, we see little upside risk and
would recommend divesting into rallies.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Ultratech Cements
Cost attack
Event
2QFY12 results well below estimates: Ultratech Cements reported 2QFY12
results 21% below our estimate because of sharper-than-anticipated rises in
freight and repair costs. Cement prices have moved up again, driven by
supply discipline, giving a false sense of security, but the chances of penalties
being imposed by the Competition Commission of India (CCI) have also risen
and they could come as a shock. We retain our Underperform and
recommend selling into rallies.
Impact
Strong 2QFY12 results due to low base: Ultratech reported net sales of
Rs39.1bn, up 22% YoY as realisations rose by 22% and volumes stayed flat.
The company reported EBITDA of Rs5.8bn, or Rs639 per ton vs Rs448/t last
year. Net profit at Rs2.8bn compared to Rs1.2bn last year.
Cement price recovery should help margins: Cement prices have
increased by around Rs20-25/bag over the average Q2 price and should help
3Q margins recover. We expect a minor reduction in costs as repair
maintenance costs of about Rs130/t and a freight cost increase of Rs100/t
partly due to one-off shifting of clinker within facilities were specific to Q2.
However, this will likely be partially offset by higher costs due to increases in
rail freight and lower availability of coal from Coal India.
But already in our estimates: We are building in margin of Rs934/t for FY12
and volume of 43mt. To achieve this, we expect UTCEM to show EBITDA/t of
Rs934/t and volume 24mt in the second half of FY12. In case of a volume
shortfall by 1mt, required EBITDA/t will increase to Rs975/t.
Current costs understated: Given the lower production levels, UTCEM has
optimised its operations. This has reduced the fixed costs to lower than
normalised levels to an extent, though variable costs have been impacted by
increases in coal and diesel prices. As the company increases production, this
advantage might erode.
Earnings and target price revision
No change.
Price catalyst
12-month price target: Rs740.00 based on a DCF methodology.
Catalyst: Fall in cement prices.
Action and recommendation
Maintain Underperform: The Indian cement industry is experiencing huge
oversupply, and low demand growth. However, profitability has been
maintained at higher than originally expected levels, and hence this has
reflected in stock price performances. From here, we see little upside risk and
would recommend divesting into rallies.
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