UltraTech Cement - ICICI Securities Fundamental Top Picks for 2015

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UltraTech Cement (ULTCEM) Target Price: | 3240 (22% upside)
• We continue to prefer UltraTech Cement in the large-cap space as we
believe the company is best placed to capture the full growth potential in
tandem with a sharp economic recovery, given its pan-India presence and
high cost efficiencies among large caps in the cement space. The current
grey cement capacity stands at 60.2 MT (ex-MP unit of Jaypee Cement)
with market share of 17% in the cement industry in India
• The company has consistently remained ahead of its peers in terms of
capacity expansion with a CAGR of 23% vs. peer’s CAGR of 13% over the
past five years. During FY14, UltraTech increased its capacity by 6% YoY
to 53.9 MT by commissioning the 3.3 MT clinker plant in Karnataka. The
company recently acquired Jaypee’s Gujarat cement unit with 4.8 MT
capacity. Further MoU for acquiring 4.9MT cement capacity in Madhya
Pradesh of Jaypee Cement has resulted in total capacity of ~65 MT,
which is well ahead of the company’s targeted expansion plans for FY15E
• The lower lead distances due to a pan-India presence, captive power
plants (733 MW), higher sales realisations due to a higher trade mix has
helped the company to generate healthy operating margins (i.e. 18-20%)
in the industry. It has also been able to reduce its power consumption per
tonne gradually through various initiatives. Power requirement of ~80%
is met through captive power plants, which helps the company in
maintaining lower fuel costs per tonne
• We believe the industry’s capacity utilisation bottomed at ~71% in FY14.
We think low capacity additions and demand recovery should lift
utilisation levels from hereon given the cyclical upturn in the economy
coupled with an expected policy push to drive investments in the
infrastructure sector. Being a net debt free company, UltraTech is well
positioned to reap the benefit of a recovery in demand and generate
healthy free cash flows in future. The stock is currently trading at 13.7x
and 11.3x EV/EBITDA for FY16E and FY17E, respectively, against last four
year’s average valuations of 13.0x. We value the stock at 13.5x its FY17E
thereby arriving at a target price of | 3240