UltraTech Cement - Valuations Not Cheap:: Citi

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UltraTech Cement (ULTC.BO)
India’s Largest Cement Company But Valuations Not Cheap
 India's largest cement company — UTCL incorporates all the cement
businesses of the Aditya Birla Group. UTCL’s merger with Grasim’s cement
division (Samruddhi) wef 1 July 2010 takes its total capacity to 49mtpa. It
just completed the acquisition of ETA Star Cement (3mtpa based in UAE,
Bahrain and Bangladesh) having paid US$126/t. Maintain Sell on combination
of cement pricing trends, higher costs, and falling EBITDA margins.
 Increasing target price to Rs965 — We raise our TP to Rs965 (from Rs745)
based on Dec-11E EV/tonne of US$120 (vs. Sep-10E earlier). Replacement
cost is our key valuation tool but it has moved up to US$120/t (from
US$100/t) to reflect higher capex costs. We now value UTCL in line with
replacement costs (vs. 10% discount earlier). At our revised TP, UTCL
trades at an EV/EBITDA of 9.2x and P/E of 19.4x.
 2QFY11: Sharp drop in consolidated PAT — ULTC reported its first set of
results for the consolidated cement entity. 2Q PAT fell sharply, by 82% YoY
on a like for like basis, due to cement prices falling ~17% YoY and ~8%
QoQ. It was also impacted by a hike in coal prices, as ULTC imports ~33% of
its coal (landed cost of imported coal rose from US$76/t to US$110/t). Sales
volumes grew by a sluggish 3.4% YoY to 9.1m tonnes (cement & clinker),
impacted by monsoons and sluggish demand in South India (23% of
volumes). The mix was better as the proportion of clinker reduced YoY.
 Expansion update — UTCL plans to set up 25mtpa of cement capacity by
2015 to maintain market share. It announced plans to start work by end-
FY11 on two 4.6mtpa brownfield capacities (Chhattisgarh & Karnataka) at a
total capex of Rs56bn (US$135/t, higher than average as it includes bulk
terminals and split grinding units), with completion expected by end-FY13.
 Valuations not cheap — Low prices during 2QFY11 reportedly led to a cut in
production and helped hike prices in most markets, especially in South India
(where the drop was the sharpest). While prices have recovered lost ground
recently and should remain firm in 3QFY11, we believe a correction is likely
next quarter as there is more than adequate supply and the market is still
fragmented. ULTC trades at US$137/t, which does not appear cheap relative
to replacement cost.
 Upside risks — (1) Continued price strength; (2) Delays in capacity; (3)
Higher-than-expected demand growth; and (4) Lower duties/taxes.