Ultra Tech Cement - Strong operating performance, upgrade to buy - Centrum

Ultra Tech's Q1FY13 result was above estimates (op. margin of 25.5% vs. est. 22.4%) primarily due to higher realizations (increase in blended realization at 6.5% QoQ vs. est. 2.7%) and lower other expenses (Rs727/tonne vs. est. Rs785/tonne). The company reported EBITDA of Rs12.9bn vs. est. Rs11.1bn and profit at Rs7.8bn vs. est. Rs6.5bn. Going forward, we expect an uptick in utilization rate of the industry with our expectation of improvement in demand scenario. In Apr-May '12, despatches growth of the industry was at 9.6% against 0% in the same period last year. We expect cement demand to grow at 8-9% in FY13E and FY14E and believe that utilization rate of the industry will be at 76% in FY13E and 78% in FY14E (against 74% in FY12E). Over the past one year, cement prices have sustained at higher levels and the industry ensured price hikes despite lower utilization rates which compensated for increase in operating costs (freight, energy and raw material) and resulted in expansion of operating margins. Recent ruling of the Competition Commission of India against cement companies is likely to have no impact in the near term and the management has indicated it would go in appeal against the order in the Appellate Tribunal, which in our view will be a prolonged affair as we have seen in the case of DLF. To factor in higher realization, we have revised our realization assumption by 4.5%/4.8% for FY13E and FY14E which resulted in EPS of 29.3%/23.7%, an upward revision in EPS estimates for FY13E/FY14E. Consequently, we revise our rating on the Stock from Sell to Buy with a price target of Rs1,844.

- Higher realization results in better profits and helps to beat estimates: Higher blended realization (up 12.1% YoY) and sales volume (up 3.7% YoY) resulted in 16.3% YoY growth in revenues to Rs50.7bn, 2.7% above our estimates of Rs49.4bn. We had estimated blended realization to be at Rs4,749/tonne (up 2.7% QoQ). Higher sales volume and realization resulted in 8.7% YoY growth in op. profit to Rs12.9bn (vs. est. Rs11.1bn).

- Higher op. costs negate the benefit of higher realization resulting in op. margin contraction: Despite higher realization, 14.8% YoY increase in op. costs/tonne resulted in 176bps YoY contraction in op. margin to 25.5%. Higher op. costs was primarily due to 16.3% YoY increase in raw material cost, 17.1% YoY increase in employee costs and 29.9% YoY increase in freight cost.

- Higher other income and lower interest cost boost adjusted profit: Higher other income of Rs849mn (up 85% YoY) and lower interest cost (down 36% YoY) resulted in 18.4% YoY growth in adjusted profit to Rs7.8bn.

- Earnings estimates upgraded on higher realizations: To factor in higher realization and better profits in the quarter, we have revised our realization assumption by 4.5%/4.8% for FY13E and FY14E which resulted in EPS of 29.3%/23.7%, upwards revision in EPS estimates for FY13E/FY14E.

- Upgrade rating to Buy: Cement manufacturers have been to able to ensure price hikes despite lower utilization rates over the past one year which compensated for increase in operating costs (freight, energy and raw material) and resulted in expansion of operating margins. With our expectation of improvement in utilization rates over the next two years, we do not see any risk to pricing power of manufacturers which will result in improved earnings. The stock is trading at 13.3x FY14E EPS and 7.7x EV/EBITDA. We upgrade our rating on the stock to Buy from Sell with a revised price target of Rs1,844 (earlier: Rs1,179).

Source : Equity Bulls

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