UltraTech Cement -We see large downside to consensus estimates, and prefer parent Grasim at current valuations:: JPMorgan

UTCEM’s reported earnings were broadly in line with estimates, but EBITDA (ex
Other Operating Income) had a slight miss. UTCEM’s 4% y/y volume decline
highlights the weak industry environment. We remain sharply below consensus
estimates (16/24% for FY14/15E) and see material downside to Street estimates,
essentially on a weak industry environment affecting cement prices and volumes.
We roll forward our PT to Mar-14 from Dec-13 but reduce our target multiple to
8x FY15E EV/EBITDA as demand is likely to remain weak in the near term. We
remain UW on UTCEM and prefer parent GRASIM at current valuations.

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 Higher-than-expected ASP decline offset by lower costs and other
operating income: UTCEM reported 4Q EBITDA of Rs12.8B (+22% q/q, -3%
y/y) vs. JPMe/consensus of Rs12.4B. Sales were lower than expected driven by
lower ASPs (-1% q/q vs. JPMe of a marginal increase q/q). However, sharply
higher other operating income and lower costs led to in-line operating results.
The company continued to see lower power cost/mt (-13% q/q), which in our
view was driven by higher pet coke usage. Freight cost/mt increased ~1% q/q
and should see further increase in 1Q FY14 with higher railway freight and
diesel costs. EBITDA/T stood at Rs1152/T, up 9% q/q. PAT was Rs7.3B vs.
JPMe of Rs6.9B driven by higher-than-expected other income. UTCEM
announced dividend of Rs9/sh (~9% payout) for FY13.
 Capex focus continues, with another expansion announced: UTCEM
completed its Chhattisgarh expansion in the quarter and plans to commission
Karnataka expansion in 1Q FY14. Cement capacity increased to ~51mt from
48.8mt. The board also approved the 2.9mt brown field expansion in Rajasthan
(likely to be commissioned by Mar-15) with an estimated capex of Rs20B
(implying capex/t at Rs6900/T).
 Industry outlook remains challenging – volume growth likely only in 2H:
We expect cement prices to remain under pressure until the end of the rainy
season. An election-led demand increase should start to come through in 3Q
FY14. Costs are likely to continue to inch up given steady diesel price increases.
 We see material downside to Street estimates: We estimate UTCEM volume
growth at ~5% in FY14. We expect EBITDA/T to decline from current levels
into 1H before recovering in 2H.
 Valuation premium does not reflect the current depressed cement
environment, in our view – we stay UW, and prefer parent Grasim: We
prefer parent Grasim as we see its risk-reward ratio as more favorable.