Buy Grasim/UltraTech:: Cement volumes, prices resilient :Motilal Oswal

Cement volumes, prices resilient
VSF prices have bottomed-out; mega capex plans on track
 Cement volumes are likely to grow 8% in FY13 and 9-10% in FY14; prices are resilient
with sub-normal seasonal correction this monsoon.
 VSF prices have stabilized, with further downside unlikely, as Chinese players would
be making losses at 65-68% utilization. Grasim expects sustainable EBITDA margin of
25-30%.
 UltraTech has capex plans of ~INR157b over the next 3-4 years. Grasim would be
investing INR37.4b to augment its VSF capacity by FY13.
 The outlook for both the cement and VSF businesses is improving. Maintain Buy on
Grasim/UltraTech .

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Cement: Volume to see 8%+ growth over FY13/14; pricing showing
resilience
 Cement demand outlook remains positive with 8% growth in FY13 and
potentially 9-10% in FY14 driven by positive boost in infrastructure. Northern
and Western markets are witnessing good growth.
 Rural and semi-rural markets would be key drivers with lower incremental
expectations from infrastructure and organized real estate over near term.
 Major capacity addition is behind us and new additions (~66mt by FY15) will
be in line with incremental demand - thus, gradually easing the oversupply.
 Prices are showing resilience with lower seasonal dip in this monsoon. Amidst
elevated cost factors, profitability to sustain at INR1,200-1,300/ton.
 UltraTech has increased pet coke usage since 1QFY13 as its prices are coming
down. Pet coke now accounts for 25% of coal usage.
 UltraTech is confident of winning appeal against alleged cartelization order
of CCI (Competition Commission of India).
VSF prices bottomed out; expect sustainable margins of 25-30%
 VSF prices have stabilized with no further downside as Chinese players would
be making losses at 65-68% utilization. Average prices in QTD 2QFY13 remain
broadly stable QoQ at INR128/kg.
 However, price recovery could be delayed. Cotton production in forthcoming
season would be the key influencing factor for VSF demand and pricing. Expect
sustainable EBITDA margin of 25-30%.
Mega capex plans on track; water shortage issues largely resolved
 UltraTech is investing ~INR157b over the next 3-4 years to add new capacities,
logistics infrastructure and modernization of its plants.
 Its work-in-progress plants at Raipur (4.8mt) and Karnataka (4.4mt) are
expected to start operations by 1QFY14, along with grinding units at Pipava

(2QFY13). The company expects both the plants to witness healthy utilization
as it is short of capacity in these markets.
 Grasim is expanding capacity in VSF by 156,500 tons (greenfield + brownfield)
at Vilayat and Harihar, also supplemented by caustic capacity of 182,500 tons.
It would be investing INR37.4b to augment its VSF capacity by 47% to 490,475
tons by FY13. VSF business would have 80% captive pulp at expanded capacity.
 Post capacity addition in VSF, Grasim would have 15% market share in global
VSF market of 3.5mt.
 Water storage issue for new VSF plants as well as Nagoda has been addressed.
Valuation and view
 The outlook for VSF is improving, driven by potential weak cotton production
in FY13.
 Cement business outlook is improving, with expected improvement in demand
and pricing. Further, its aggressive capex plan of investing INR157b over the
next 2-3 years endorses our long-term positive outlook for both the businesses.
 Grasim is quoting at an attractive 8x FY14E consolidated EPS, an EV of 4.8x
FY14E EBITDA, and implied cement business valuation of USD91/ton (on 60mt
capacity). Ultratech is trading at 14.2x FY14E EPS; EV of 8.6x FY14E EBITDA and
USD145/ton.
 We maintain Buy on Grasim, with a target price of INR3,320 (SOTP-based,
valuing economic interest in cement business at an EV of 9x FY14E EBITDA and
30% hold-co discount, and the VSF business at an EV of 4x FY14E EBITDA), and
on UltraTech with a target price of INR1,822 (EV of ~9x CY13E EBITDA).