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UltraTech Cement
Falling short of expectations
2QFY11 results were weaker than our expectations because of lower realisations
and higher costs. The recent sharp rally in the cement price should improve
earnings from 2QFY11 levels, but we remain sceptical on the sustainability of the
price, given the demand-supply mismatch. We cut FY11-13F EPS by 22-37%.
2QFY11 results reflect a 655 yoy drop
Ultratech reported EBITDA/mt of Rs448 vs Rs1,370 in 2QFY10. Its EBITDA/mt also fell
sharply qoq, from Rs974 in 1QFY11, as costs rose 5.8% even as the cement price declined
9.2%. PAT was down 81.7% yoy to Rs1.16bn. These results reflect the merged operations
with Samruddhi Cement Ltd, hence Ultratech now has a capacity of 52mmt.
Is the worst behind the company in terms of margin?
Recent price hikes, which were steeper than we expected, have largely reversed the
declines in most markets. EBITDA/mt could rise by Rs300/mt in 3QFY11F. We estimate the
industry’s cement capacity at 285.5m metric tonnes at end-FY11 and 304.3mmt at end-
FY12, vs demand of 216.2mmt and 235.6mmt, respectively. Given that we forecast capacity
utilisation of 75% in FY12, production discipline is needed over the next 15 months to keep
prices stable. However, we are unsure whether the recent price hikes can be sustained,
based on the historical trend.
Downgraded EPS forecasts; maintain Sell
We are cutting FY11-13F EPS by 22-37% to reflect the weak 2QFY11 results and our view
that cement prices will see no further momentum. We have EBITDA/mt forecasts of Rs753
for FY11 (vs the Rs572 reported in 1HFY11), Rs705 for FY12 and Rs791 for FY13. Our
DCF-based target price rises to Rs832.19 mainly on the back of the earnings cuts and capex
updated for guidance. The stock looks expensive at a US$154 EV/mt in FY12F, at a 40%
premium to our replacement cost estimate. We believe the market is not pricing in the risk of
a relapse into cement price weakness.
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