UltraTech Cement - Operationally in-line results, maintain Buy - Centrum

UltraTech's Q1FY14 result was in-line with our estimates on operational parameters with Revenue at Rs49.6bn (vs. est. Rs49.7bn), EBITDA at Rs10.5bn (vs. est. Rs10.6bn) and OPM at 21.2% (vs. est. 21.3%). However, PAT during the quarter was at Rs6.7mn (12.3% above our est. of Rs6bn) led by higher other income (Rs1.9bn vs. est. Rs1.4bn) and lower tax rate (26.8% vs. est. 32%). Higher other income was primarily due to higher treasury income during the quarter. Blended EBITDA/tonne was at Rs1,041 vs. est. Rs1,052. Cement demand has been under pressure for the past one year impacting the pricing power of manufacturers. Going forward, we expect recovery in cement demand in 2HFY14E, which should result in improved pricing power for cement manufacturers leading to improved profitability. The company will also benefit from its planned capacity expansion of 10.2mt (2.15mt grinding unit has already been commissioned) by Q2FY14E after which its grinding capacity in India will stand at 59mt by FY14-end. During the quarter, the company commissioned 3.3mt clinkerization unit at Karnataka. However, considering weak demand and pricing scenario, we have revised EPS estimates downwards by 1.7%/6.1% for FY14E/FY15E. We maintain Buy on the stock with a revised one-year price target of Rs2,074 (earlier: RS2,231).

Lower sales volume and realization impact revenue and operating profit: Led by a decline of 2.1% YoY in sales volume (cement and clinker) and 0.2% YoY in blended realization, the company reported 2.3% YoY decline in revenue to Rs49.6bn. Operating profit was down 18.8% YoY to Rs10.5bn primarily due to the decline in sales volume and higher operating costs.

Higher op. costs impact profitability: Operating cost during the quarter was up 5.6% YoY to Rs3,877/tonne primarily due to an increase of 5.9% YoY in raw material cost, 14.6% YoY in employee cost, 8.6% YoY in freight cost and 16.7% YoY in other expenses. On a per tonne basis, energy cost declined 6.9% YoY to Rs982/tonne due to higher usage of pet coke in the fuel-mix (46% in Q1FY14) and decline in imported coal price (6% YoY drop to US$80/tonne). Driven by higher op. costs and lower sales volume, op. margin of the company declined 4.3pp YoY to 21.2%. Blended EBITDA/tonne declined 17% YoY to Rs1,041/tonne.

Earnings estimates revised downwards: We have revised our volume (cement & clinker) estimates downwards by 2% each for FY14E/FY15E to 42.3mt. We have also revised blended realization assumption downwards by 2% each for FY14E/FY15E. Our EPS estimate stands revised downwards by 1.7%/6.1% to Rs104.8/Rs130.8 for FY14E/FY15E.

Maintain Buy: we expect recovery in cement demand in 2HFY14E, which should result in improved pricing power for cement manufacturers leading to improved profitability. The company is set to benefit from its capacity expansion of 10.2mt (2.15mt grinding unit has already been commissioned) by Q2FY14E. The management is also committed to improve operational efficiency as a large portion of the capex is for development of infrastructure; modernization and upgradation, which will benefit the company in the long-run. We expect RoCE of the company to improve to 21.2% by FY15E against 17.3% in FY13E. Net D/E is expected to improve to 0.01x by FY15E against 0.11x in FY13E. We expect EBITDA margin to improve to 25.8% by FY15E against 22.6% in FY13 and blended op. profit/tonne will reach to Rs1,384 in FY15E against Rs1,112 in FY13. The stock is trading at 14.4x FY15E EPS, 7.4x EV/EBITDA and EV/tonne of US$156.7. We value the stock at 8.5x FY15E EV/EBITDA and maintain Buy with a revised one-year price target of Rs2,074 (earlier: Rs2,231), upside of 10.3% from CMP.

Source : Equity Bulls

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