Robust performance; maintain Buy Ultra Tech:: Centrum

Robust performance; maintain Buy
Ultra Tech’s Q3FY13 result was above estimates (op. margin of 21.1% vs. est.
18.3%) primarily due to lower-than-expected op. costs. The company reported
EBITDA of Rs10.2bn (vs. est. Rs9.1bn) and adjusted profit of Rs5.9bn (vs. est.
Rs4.8bn). Op. cost/tonne during the quarter was Rs3,940/tonne vs. est.
Rs3,856/tonne primarily due to lower energy cost (Rs1,089/tonne vs. est.
Rs1,150/tonne) and lower raw material cost 0f Rs588/tonne vs. est. Rs643/tonne
(adjusted for inventory adjustment). Higher EBITDA and other income (Rs1.2bn vs.
est. Rs900mn) resulted in adj. profit of Rs5.9bn vs. est. Rs4.8bn. Going forward, we
believe that utilization rate of the industry will improve to 80.4% by FY15E after
bottoming out at 76.4% in FY13E. We expect cement demand to grow at ~7% in
FY13E and improve to 8-9% in FY14E. We believe improvement in utilization rate
and demand scenario will lead to improved pricing power of cement
manufacturers and help them pass on the rise in input cost to consumers leading
to improvement in operating margins for the industry. The company will also
benefit from its planned capacity expansion of 10.2mt by Q2FY14E after which its
grinding capacity in India will stand at 59mt against 48.8mt currently. We
maintain Buy on the stock with a one-year price target of Rs2,316.
Lower than expected cost leads to better results and helps beat estimates:
Though lower than expected grey cement sales volume of 9.62mt (vs. est. 10mt)
led to lower revenue of Rs48.6bn (vs. est. Rs49.6bn). The company reported op.
profit of Rs10.2bn (vs. est. Rs9.1bn) driven by lower-than-expected op. costs.
Blended realization/tonne during the quarter was at Rs4,887/tonne vs. est.
Rs4,850/tonne. Op. cost/tonne during the quarter was at Rs3,940/tonne vs. est.
Rs3,856/tonne primarily due to lower energy cost (Rs1,089/tonne vs. est.
Rs1,150/tonne) and lower raw material cost 0f Rs588/tonne vs. est. Rs643/tonne
(adjusted for inventory adjustment).
Higher realization leads to stable margins despite volume decline and cost
pressure: EBITDA margin remained stable at 21.1% during the quarter driven by
8.7% YoY increase in blended realization though volume decline by 2.2% YoY and
op. cost/tonne increased 8.7% YoY. Op. cost increase was largely due to increase in
raw material cost, freight cost and other expense on a per tonne basis. Employee
cost increased 12.5% YoY to Rs246/tonne. EBITDA/tonne increased 8.5% YoY to
Rs1,030/tonne.

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Earnings estimates revised downwards: We have revised our earning
estimates downwards by 3.2%/3.5% to Rs101.5/Rs118.0 for FY13E/FY14E
considering pressure on cement realization during the quarter.
Maintain Buy: With our expectation of gradual improvement in utilization rates
(80.4% by FY15E against 76.4% in FY13E) of the industry in FY14E and FY15E, we
do not see any risk to pricing power of manufacturers which in our view, will result
in improved earnings. With government’s increased thrust on infrastructure
spending, we believe that cement demand growth will reach to 8-9% by FY14E.
RoCE of the company is expected to improve to 22.6% by FY15E against 17.6% in
FY13E. We expect EBITDA margin of the company to improve to 26.4% by FY15E
against 22% in FY12 and operating profit/tonne will reach to Rs1,461 in FY15E
against Rs942 in FY12. EPS of the company is expected to grow at a CAGR of 21.1%
between FY12-FY15E. The stock is trading at 16.2x FY14E EPS, 9.6x EV/EBITDA and
EV/tonne of US$200.7. We value the stock at 10x mid-FY15E EV/EBITDA and
maintain Buy on the stock with a one- year price target of Rs2,316, upside of 21.3%
from CMP.