Ultratech (UTCEM): The largest pan-India play  ::HSBC Research

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Ultratech (UTCEM): The
largest pan-India play
 Grasim cement business merger diversifies uni-region risks;
UTCEM is the largest pan-India cement play now
 Expect EBITDA to stay flattish in FY12 following a lack of capacity
addition
 Expect valuation discount versus other large cement players to
diminish; initiate with N and TP of INR1,060


Samruddhi merger diversifies risk
The merger of Grasim’s cement unit has reduced
UTCEM’s exposure to the Southern region from
c35% to c26% now – and volumes are now spread
equally in all regions thereby diversifying risks.
We expect UTCEM’s volumes to register c9%
CAGR over FY11-13, driven by growth in the
West and Central regions.
Expect EBITDA to stay flattish over FY11-13
following lack of capacity additions
We expect EBITDA for UTCEM to register c5%
CAGR over FY11-13 as no new capacity will
likely get commissioned over this time frame and
following our expectation that costs will increase
faster than cement prices in FY12.
Valuation discount to ACC/ACEM will likely lower
We believe UTCEM’s historical discount to
ACC/ACEM will likely decrease going forward.
Historically, UTCEM’s costs have been higher
than large-cap peers’ by 10-20%; however
UTCEM has traded at a discount to ACC/ACEM
given Holcim’s acquisition of both companies.
Expect EBITDA to grow c5% over FY11-13
We forecast EBITDA to register a CAGR of just
c5% over FY11-13 despite a c8% increase in
volumes following a decline in per ton EBITDA.
We however note that we are below consensus
EBITDA estimates for FY12 by c7%.
Initiate with N and TP of INR1,060
UTCEM has underperformed ACC/ACEM by
c4% on a YTD basis (Jan-11) – a trend we expect
would reverse over the rest of the year. We
initiate coverage of UTCEM with a Neutral rating
and a target price of INR1,060.
Risks
Downside: A greater-than-expected hike in the
cost of raw materials
Upside: A greater-than-expected increase in
cement prices will improve the company’s
profitability.