Ultra Tech Cement - Strong operating performance; maintain Buy - Centrum

Ultra Tech's Q2FY13 result was above estimates (op. margin of 21.4% vs. est. 20.5%) primarily due to higher realizations (Rs5,059/tonne vs. est. Rs4,952/tonne). The company reported EBITDA of Rs10bn (vs. est. Rs9.3bn) and profit of Rs5.5bn (vs. est. Rs5.2bn). Going forward, we believe that utilization rate of the industry will improve to 81% by FY15E after bottoming out at 76.4% in FY13E. We expect cement demand to grow at ~7% in FY13E and improve to 8-9% in FY14E. 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 FY14E after which its grinding capacity in India will stand at 59mt against 48.8mt currently. The company has appealed against the ruling of the Competition Commission of India in the Competition Appellate Tribunal and believes it has a good case. We maintain Buy on the stock with a one-year price target of Rs2,334.

- Higher realization results in better profits and helps beat estimates: Higher blended realization (up 19.3% YoY) and sales volume (up 0.8% YoY) resulted in 20.2% YoY growth in revenues to Rs47bn, 3.2% above our estimates of Rs45.5bn. The company reported blended realization of Rs5,059/tonne vs. est. Rs4,952/tonne. Higher realization and sales volume resulted in 73.2% YoY growth in op. profit to Rs10bn (vs. est. Rs9.3bn). Adj PAT of the company increased 109% YoY to Rs5.5bn.

- Higher realization leads to margin expansion despite cost increases: EBITDA margin expanded 656pp YoY to 21.4% driven by a steep increase in blended realization even though operating cost/tonne increased 10.1% YoY. Increase in operating cost was due to 21% YoY increase in raw material costs, 15.5% YoY employee expense, 11.6% YoY in energy costs, 23.3% YoY in freight costs and 6.2% YoY in other costs on a per tonne basis.

- Capex plans on schedule: The expansion plans of the company in Karnataka and Chhattisgarh are progressing as scheduled and the management expects these to get completed by Q1FY14E. After completion of these projects and 1mt of grinding unit in Gujarat, domestic grinding capacity of the company will increase to 59mt from 48.8mt now. We have assumed volume growth from the new plants to accrue from Q4FY14E for our assumptions.

- Maintain Buy: With our expectation of gradual improvement in utilization rates (81% by FY15E against 76.4% in FY13E) of the industry in FY14E and FY15E, we do not see any risk to pricing power of manufacturers which in our view, will result in improved earnings. With government's increased thrust on infrastructure spending, we believe that cement demand growth will reach to 8-9% by FY14E. RoCE of the company is expected to improve to 16.6% by FY15E against 14.1% in FY13E. We expect EBITDA margin of the company to improve to 26.8% b FY15E against 22% in FY12 and operating profit/tonne will reach to Rs1,496 in FY15E against Rs942 in FY12. EPS of the company is expected to grow at a CAGR of 22.5% between FY12-FY15E. The stock is trading at 16.4x FY14E EPS, 9.8x EV/EBITDA and EV/tonne of US$209.9. We value the stock at 10x mid-FY15E EV/EBITDA and maintain Buy on the stock with a one-year price target of Rs2,334, upside of 16.1% from CMP.

Source : Equity Bulls

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