Sell Ultratech Cement - TP Rs.1290 - Emkay

Sell, Target Price Rs 1,290 Rich valuation to restrict out performance

Demand scenarios remain uncertain: With sharp slowdown in economic activity coupled with deceleration in saving rate we remain skeptical about the recent buoyancy in cement dispatches. Further Ultratech's key market could be impacted by acute shortage of sand led by sand mining ban imposed in states like AP, Haryana & Punjab (~13% dispatch share in these states).

Supply overhang to remain: On the supply side our channel checks suggest that the industry is likely to see capacity addition of 76 mtpa over CY12-15, thereby ensuring cement supply CAGR of 9.5% over FY12-14E vs cement demand CAGR of 9%. Hence we expect that prices are unlikely to see any structural uptrend and hence price volatility will continue.

Unusual Price decline in May to affect realizations: All India Cement prices in May were down 4% over recent peaks. Usually in May pricing scenario remains benign as the construction activities peak before onset of monsoon. The pricing trend is surprising given that May volume growth (top 5 players +14% yoy) was much stronger than April growth (Top 5 players 5%).

Recent cost increases yet to reflect: Though UTCEM's 4QFY12 performance was boosted by lower costs helping expansion in margins, we expect margins to come under pressure as the recent cost increases like railway freight hike (+23% effective from March 6, 2012) & excise duty hike (+200 bps from March 16, 2012)) are yet to reflect completely.

Near term catalyst and earnings performance: With muted EBIDTA CAGR of 14% over FY12-14E, stock's valuations at, EV/E of 8.3X & EV/T of USD145 remain expensive (almost equivalent to Ambuja with EV/E of 9X & EV/T of USD152 which historically traded at a premium of ~30% on EV/T and ~20% on EV/E basis) and does not factor in margin risks and volume concerns leaving little upside from current levels. Maintain negative bias with TP of Rs1290.

Source : Equity Bulls

Keywords