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ULTRATECH
Fundamental view
• UltraTech Cement is one of the most geographically diversified and undoubted leaders in the Indian cement
industry with a capacity of 62.0 MT and market share of ~17%. Also, as one of the most efficient players in the
industry, it has commanded better margins compared to its peers. Further, the company has consistently
remained ahead of its peers in terms of capacity expansion with a CAGR of 23% vs. peer’s CAGR of 13% over
the past five years. The acquisition of the 4.8 MTPA Gujarat cement unit of Jaypee Cement Corporation at a
cost of | 3800 crore has strengthened the company’s presence in the growing western market. Other than that,
the company has commissioned a 25 MW thermal power plant at Rajasthan Cement, Karnataka and a 6.5 MW
waste heat recovery system at Awarpur, Maharashtra. With this, the total power capacity of the company
(including WHRS) stands at 709 MW, which is around 80% of the company’s power requirement. Further, the
company is aiming to reach a total capacity of 70 MT by FY16E, which we believe would help it to maintain its
leadership, going forward
• With lower lead distances due to a pan-India presence, captive power plants and higher sales realisations due
to a higher trade mix coupled with higher white cement sales realisation, the company generates highest
EBITDA/tonne in the industry. It has also been able to reduce its power consumption per tonne gradually
through various initiatives. Power requirement of ~80% is met through captive power plants, which helps the
company in reducing per tonne cost. Other than this, the company also has coal linkages with Coal India,
which helps in lowering dependence on imports
• We believe the industry’s capacity utilisation bottomed at ~72% in FY14. We think low capacity additions and
demand recovery should lift utilisation levels from hereon given the cyclical upturn in the economy coupled
with an expected policy push to drive investments in the infrastructure sector. We forecast pan-India utilisation
at 78% by FY16E. Excluding south, utilisation levels for the industry are expected at over 80% by FY16E levels
that could offer pricing power. Given this scenario, we expect UltraTech, being a industry leader with strong
balance sheet, to trade at premium valuations
Heidelberg
Fundamental view
• Heidelberg Cement is a central regional player that contributes over ~94% of its total revenues. The company
recently doubled its cement capacity to 6 MT from 3 MT in CY13 at a total capex of | 1570 crore. However, due
to subdued demand, these major expansions took a heavy toll on its profitability with the company reporting a
net loss of | 41 crore in CY13 (vs. net profit of | 31 crore in CY12) led by high interest and depreciation. It
currently operates at very low margins in the industry (average of 6.5% in the last three years) due to lower
cement realisation in the central region and dependence on high cost power from grid and higher lead
distances. However, given the favourable demand and limited new capacity additions, we expect the company
to achieve utilisation rate of 85% by CY15E. This, in turn, would drive volume growth, going forward
• To bring down the freight costs, the company has installed a conveyor belt between its limestone reserves and
clinker units, which are 20 km away (at a cost of | 200 crore) to transport limestones to its clinkerisation unit,
which are currently being transported by trucks. This would help the company in achieving cost savings of
about ~| 45-50/tonne. Further, to reduce its power costs, the company is currently setting up a 13 MW waste
heat recovery plant (capex of ~| 180 crore), which will be commissioned by early 2016E. Considering the
benefit of conveyor belt, economies of scale coupled with better utilisations, we expect operating margins to
improve to 14.8% in CY14E and 16.1% in CY15E from 6.3% in CY13
• Heidelberg’s Indian operations have the support of the rich experience of the German promoter (Heidelberg
AG), a Germany-based company, which is one of the world’s largest cement manufacturers with consolidated
revenue of €14 billion in 2013. This, we believe, would provide a huge potential to grow inorganically over the
longer run
• The company’s revenue has grown at a CAGR of 16.6% during FY10-13 led by volume CAGR of 9.9%
supported by realisation CAGR of 6.1% during the same period. For CY13-15E, we expect sales CAGR of
18.4% with volume CAGR of 12.7% and realisation CAGR of 5.0% during the same period. With all capacity
concentrated in the central region and steps like overhead belt conveyor to transport limestones to the
clinkerisation unit, going forward, we can expect margins to improve. We expect them to reach 15.1% by
CY15E. The stock is currently available at an EV/tonne of $80/tonne on FY16 capacity, which is at a significant
discount to the current replacement cost of $140-150/tonne
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