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Headwinds Don’t Spare The Tough
Its large dependence on the West (30% of despatches) and the South
(26% of despatches) exposes UltraTech to near-term competitive
pressures in its largest regions as declining demand in the South
forces southern manufacturers to compete for the adjoining Western
market. The recent decline in realisations in the western region will
compound the impact of low capacity utilisation and rising cost of
production. We expect cost of production to further inch up and do not
expect material improvement in EBITDA/tonne over FY11-FY13 (4%
CAGR), thus leading to further declines in return ratios. The continuing
frail demand environment and declining return ratios will warrant a
correction in valuations.
Competitive position: STRONG. Change to this position: STABLE.
UltraTech’s pan-India reach and more importantly its leadership in most of the
regions of its operations, its stable and low cost structure, place it among the
strongest players in our competitive positioning. With the recent acquisition of
group company Samruddhi Cement, 15% of the company’s revenues now
come from the relatively less cyclical building materials business.
Volume growth to decline: Whilst reported volume growth for FY12 is likely
to be high (13%), the comparative volume growth for the consolidated entity is
likely to be in negative territory (down 2.5% to 37.4mn tonnes) as demand in
its second-largest region, South India, continues to decline (despatches down
7%-9% YoY over April-July 2011). Large contractors and the marketing teams
of Southern cement manufacturers highlight that demand will remain low in
the South for another couple of quarters.
Upside to realisations limited: As demand growth over the next six months
disappoints and keeps capacity utilisation low, we expect realisation growth to
remain muted. However, the larger share of UltraTech’s sales from a
disciplined South Indian market and from a mix of other building materials will
keep realisation growth ahead of peers’.
Valuations: UltraTech is presently trading at 9.4x 1-year forward EV/EBITDA
on our EBITDA estimates (17% lower v/s consensus). Whilst on EV/tonne the
stock is trading in line with the last 5-year average (US$128/tonne), on 1-year
forward EV/EBITDA, the stock is trading at a 27% premium. We expect
valuations to correct as volume growth disappoints and profitability falls (we
expect RoIC to decline to 14% in FY12 and FY13 from 17% in FY11). Demand
recovery and pricing discipline are the key risks to our SELL stance.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Headwinds Don’t Spare The Tough
Its large dependence on the West (30% of despatches) and the South
(26% of despatches) exposes UltraTech to near-term competitive
pressures in its largest regions as declining demand in the South
forces southern manufacturers to compete for the adjoining Western
market. The recent decline in realisations in the western region will
compound the impact of low capacity utilisation and rising cost of
production. We expect cost of production to further inch up and do not
expect material improvement in EBITDA/tonne over FY11-FY13 (4%
CAGR), thus leading to further declines in return ratios. The continuing
frail demand environment and declining return ratios will warrant a
correction in valuations.
Competitive position: STRONG. Change to this position: STABLE.
UltraTech’s pan-India reach and more importantly its leadership in most of the
regions of its operations, its stable and low cost structure, place it among the
strongest players in our competitive positioning. With the recent acquisition of
group company Samruddhi Cement, 15% of the company’s revenues now
come from the relatively less cyclical building materials business.
Volume growth to decline: Whilst reported volume growth for FY12 is likely
to be high (13%), the comparative volume growth for the consolidated entity is
likely to be in negative territory (down 2.5% to 37.4mn tonnes) as demand in
its second-largest region, South India, continues to decline (despatches down
7%-9% YoY over April-July 2011). Large contractors and the marketing teams
of Southern cement manufacturers highlight that demand will remain low in
the South for another couple of quarters.
Upside to realisations limited: As demand growth over the next six months
disappoints and keeps capacity utilisation low, we expect realisation growth to
remain muted. However, the larger share of UltraTech’s sales from a
disciplined South Indian market and from a mix of other building materials will
keep realisation growth ahead of peers’.
Valuations: UltraTech is presently trading at 9.4x 1-year forward EV/EBITDA
on our EBITDA estimates (17% lower v/s consensus). Whilst on EV/tonne the
stock is trading in line with the last 5-year average (US$128/tonne), on 1-year
forward EV/EBITDA, the stock is trading at a 27% premium. We expect
valuations to correct as volume growth disappoints and profitability falls (we
expect RoIC to decline to 14% in FY12 and FY13 from 17% in FY11). Demand
recovery and pricing discipline are the key risks to our SELL stance.
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