Ultratech Cement - Better than expected results, but outlook still weak - BRICS

UTCL's results were better than expectations, with PAT coming in at Rs.6bn (vs.our estimate of Rs5.33bn), mainly due to higher than expected other income. While top line rose 6% yoy, driven primarily by better realisation, EBITDA margin remained flat at 21.1%, with moderate realisation only just managing to offset rising costs. Current cement demand scenario seems weak and oversupply will ensure prices remain volatile. Consequently, the stock is expensive at an EV/tonne of US$163. We raise TP by 11% to Rs1,525 to factor in Rupee depreciation. Maintain Sell.

Higher realisation drives revenue: Cement and clinker volume declined by2% yoy due to poor demand environment. Average realisation was up 5% yoy, but downRs6/bag qoq, with poor demand exerting severe pressure on prices, especially in Dec. However, an impressive growth in RMC and white cement business boosted overall revenue by 6% yoy.

Operating margin flat due to rising costs on muted growth in realisation: UTCL's power and fuel costs/tonne fell 2% yoy, aided by a correction in international coal prices. However, the full impact of diesel price hike in mid Sep ensured freight costs were up 14% yoy. UTCL also benefited from Rs1bn worth of stock built-up during the quarter. However, a lacklustre growth in realization and rising costs resulted in flat margins at 21.1%. EBITDA/tonne rose to Rs1,004 from Rs923 in Q3FY12, but was down byRs60 qoq. While at the operating level the results were largely in line, higher than expected other income pushed PAT above our expectation to Rs6bn, marking a growth of 9% yoy.

Capex: UTCL's expansion of 9.2mn tonnes at Chhattisgarh and Karnataka is on track and should become operational in early part of FY14, which should enhance its installed capacity to 62mn tonnes.

Valuation: At the current price, UTCL trades at an EV/tonne of US$163, which is at a premium to replacement cost and given the weak demand, impending oversupply and resultant volatile prices, such premium valuations are not justified. We continue to value UTCL at replacement cost ofUS$130, but have raised TP by 11% to factor in exchange rate of Rs55 to the US$. Maintain Sell.

Source : Equity Bulls

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