UltraTech Cement (3QFY15) : A continued price squeeze. Maintain SELL :: HDFC Securities

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UltraTech Cement (UTCEM) delivered a weak quarter that was marginally above our estimates (EBITDA/t at Rs 747/t vs. est. Rs 699/t). Volumes (11.4 mT, 11.3% YoY) continued to remain strong, as full benefits of the JPA amalgamation (effective June 12 2014) continued to accrue. Weak realizations spoiled the show with both grey and white cement likely registering declines (est. ~4.0% QoQ in both)


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A continued price squeeze
UltraTech Cement (UTCEM) delivered a weak quarter
that was marginally above our estimates (EBITDA/t
at Rs 747/t vs. est. Rs 699/t). Volumes (11.4 mT,
11.3% YoY) continued to remain strong, as full
benefits of the JPA amalgamation (effective June 12
2014) continued to accrue. Weak realizations spoiled
the show with both grey and white cement likely
registering declines (est. ~4.0% QoQ in both). Strong
volume growth and expected moderation in unit
costs helped the company register a steep decline in
operating costs (down ~4% QoQ).
Pricing remains weak in most regions, with South
being the only exception, witnessing sharp jumps in
mid-December. Hence, improvements in 4QFY15 will
likely be driven by higher volumes and South prices.
Given its inherent scale, reach and cost efficiencies,
UltraTech remains the best play on infrastructure
demand growth in India. However, valuations
(US$230/t, 15x 1yr Fwd EV/EBITDA) remain
prohibitively expensive, and susceptible to sharp
price declines.
 3QFY15 updates: EBITDA at Rs 8.46bn was marginally
ahead of estimates (vs est 7.78 bn). Higher other
operating income, likely due to preponement of
incentives/dividends, and lower depreciation (due to
changes in Companies Act) led to a significant PAT beat
(Rs 3.64bn vs est Rs 2.68bn).
 Acquisitions & project updates: UTCEM will issue Rs
45.3bn in NCDs to JPA with regards to the previously
announced acquisition of its cement capacity in M.P.
The total consideration will be Rs 53.3 bn (Details on
pg. 2). Aditya expansion (2.9 mTPA) is guided for
completion by mid-FY16, while the east GU capacity
(3.6 mTPA) will be commissioned by FY16 end.
 Outlook and view: We have largely retained our
FY16/17 earnings estimates, but have cut our FY15
EBITDA estimate by ~11%. This is on account of
continued weakness in pricing. We have rolled forward
our valuations to FY17, with a TP of Rs 2,733 (10.0x
FY17 EV/EBITDA, US$190/t). Maintain SELL, given
prohibitively expensive valuations.

LINK
http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3010928