Ultratech Cements - Missed opportunity ::Macquarie Research

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��



Ultratech Cements
Missed opportunity
Event
 Sell – negative triggers ahead: Taking stock post the recent excise duty
hike, building in higher cement prices and costs, we believe that UTCEM
looks quite expensive. We cut our earnings estimates by 1-8% over the next
three years and adjust TP to Rs883 (Rs849 earlier) as we roll forward. We
expect penalties by the Competition Commission of India (CCI) and cement
price declines during the monsoon season to be key negative triggers ahead.
Maintain Underperform.
Impact
 Valuations – building in perpetual margin expansion by 9%: Our DCF
analysis shows that at 7% volume growth assumption, UTCEM’s current stock
price is factoring in EBITDA/t improvement by around 9% pa. We think this is
a very aggressive assumption given the oversupply in the market.
 Our assumptions remain optimistic: We are building in an 11% YoY
volume growth for CY12 and also building in flat EBITDA per ton of Rs973.
This is based on the assumption that the current pricing discipline in the
industry will continue.
 So is consensus: Consensus forecasts are in line with our estimates for
FY13. However, we are ahead of consensus by 17% for FY12E. We believe
consensus has yet to build in the price hikes achieved in January-March
2012. We are also around 13% higher for FY14E, although we are not sure
why consensus has such a different view here, as compared to ACC and
ACEM.
 Penalty by Competition Commission can take away 50% of net profit:
We believe that CCI is in its last stages of completing the enquiry against the
cement companies and will most likely announce penalties in the next month
or so. Based on recent trends, it is likely to be 6-7% of total revenue or around
50% of net profit.
Earnings and target price revision
 We reduce our estimates by 1%/5%/8% for FY12/13/14, respectively.
Price catalyst
 12-month price target: Rs883.00 based on a DCF methodology.
 Catalyst: Penalty by CCI possibly in April and cement price declines by June.
Action and recommendation
 Maintain Underperform: UTCEM is currently trading at a 17x FY13E PER
which is at the higher end of the historical range, and seems expensive as it is
based on maintaining pricing discipline. It also factors in a possibility of margin
expansion which looks unlikely. We suggest investors book profits and wait
for cement price correction to buy for possible dividend yield. We think that by
allowing price discipline, Ultratech may have missed the opportunity to drive
the consolidation in the industry and emerge as the undisputed leader.