Q4FY13 Result Update
UltraTech Cement
Buy
Target Price: Rs2,231
CMP: Rs1,872
Upside: 19.2%
Op. margin tad lower, expect recovery in 2HFY14E
UltraTech’s Q4FY13 result was below estimates with op. margin at 22.3% against estimated 22.8% primarily due to lower-than-expected realization and sales volume. Realization declined 1.3% QoQ to Rs4,147/tonne (est. Rs4,186/tonne). The company reported EBITDA of Rs12bn (est. Rs12.8bn) and profit of Rs7.3bn (est. Rs7.7bn). Operating cost/tonne during the quarter was at Rs3,765/tonne against estimated Rs3,777/tonne. Blended EBITDA/tonne was at Rs1,078 vs. est. Rs1,117. Going forward, we believe that utilization rate of the industry will improve to 80.4% by FY15E after bottoming out at 75.4% in FY13E. We expect cement demand to grow at ~7% in FY14E and improve to 8-9% in FY15E led by revival in capex cycle of industries; growth in housing projects (due to our expectation of cut in interest rate) and government’s thrust on infrastructure development. We believe that improvement in utilization rate and demand scenario will lead to improved pricing power of cement manufacturers and help them pass on the rise in input cost to consumers leading to improvement in operating margins for the industry. The company will also benefit from its planned capacity expansion of 10.2mt by Q2FY14E after which its grinding capacity in India will stand at 59mt against 48.8mt currently. During the quarter, the company commissioned 3.3mt clinkerization unit at Chhattisgarh and grinding unit of 2.15mt (1.55mt in Maharastra and 0.6mt in Gujarat). We have factored in grey cement sales volume growth of ~8% in FY14E and 10% in FY15E for the company. We maintain Buy on the stock with a one-year price target of Rs2,231.
m Lower than expected realization and sales volume result in lower revenues and op. profit: Grey cement sales volume during the quarter was at 10.8mt (est. 11.1mt) and clinker sales vol. was at 0.1mt (est. 0.2mt). Led by lower sales volume and realization, op. profit (Rs12bn) was 6.6% below our estimate of Rs12.8bn.
m Higher op. costs impact profitability: Despite 1% YoY increase in Revenue to Rs53.9bn, op. profit declined 5.1% YoY to Rs12bn led by higher op. costs (6.7% YoY increase). Higher op. cost was primarily due to 17.8% YoY increase in raw material cost, 13.8% YoY increase in freight cost and 8% YoY increase in other expenses. On per tonne basis, energy cost declined 8% YoY to Rs949/tonne due to higher-usage of pet coke in the fuel-mix (44% in Q4FY13) and decline in imported coal price (20% YoY drop to US$84/tonne). Driven by higher op. costs. Op. margin of the company declined 1.4pp YoY to 22.3%. Blended EBITDA/tonne declined 1.6% YoY to Rs1,078/tonne.
m Earnings estimates revised downwards: We have revised our volume estimates downwards by 2.2%/1.7% to 42.5mt/46.8mt for FY14E/FY15E. We have also revised realization/tonne assumptions downwards by 1.5% each to Rs4,285/Rs4,542 for FY14E/FY15E. Lower volume and realization assumptions lead to 9.7%/6.2% downward revision in EPS estimates to Rs106.6/Rs139.3 for FY14E/FY15E.
m Maintain Buy: With government’s increased thrust on infrastructure spending and our expectation of a revival in the capex cycle of industries, we expect cement demand to improve going forward. This will result in improvement in utilization rate of the industry in FY14E and FY15E and provide better pricing power to manufacturers. RoCE of the company is expected to improve to 22.7% by FY15E against 17.5% in FY13E. Net D/E is expected to improve to -0.04x by FY15E against 0.11x in FY13E. We expect EBITDA margin of to improve to 26% by FY15E against 22.6% in FY13 and blended op. profit/tonne will reach to Rs1,453 in FY15E against Rs1,111 in FY13. The stock is trading at 17.6x FY14E EPS, 9.4x EV/EBITDA and EV/tonne of US$187.5. We value the stock at 8.5x FY15E EV/EBITDA and maintain Buy with a one- year price target of Rs2,231, upside of 19.2% from CMP.
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