ULTRATECH CEMENTS - Buy on every dips

Scrip Code: 532538 / ULTRACEMCO

CMP:  Rs. 1033.90; Buy at current levels.
Short term Target: Rs. 1050, LT – Rs. 1150.
Market Cap: Rs. 28,333.16 cr.
52 Week High/Low: Rs. 1163.10 / Rs. 817.3.

Total Shares: 27,40,41,665 shares; Promoters : 17,36,05,057 shares –63.35 %; Total Public holding : 10,04,36,608 shares –36.65 %;

Book Value: Rs. 224.80; Face Value: Rs. 10; EPS: Rs. 51.24; Div: 60 %.P/E: 20.10 times; Ind P/E: 13.67; EV/EBITDA: 14.23. 

Total Debt: Rs. 3,532.12 cr; Enterprise Value: Rs. 65,583.10 cr

UltraTech Cement Ltd was incorporated in the year 2000, based in Mumbai. The company was formerly known as Ultra Tech CemCo Ltd which was changed to Ultra Tech Cement Ltd in October of 2004. It’s a subsidiary of Grasim Industries Ltd from Aditya Birla Group. The Company has an annual capacity of 23.1 million tons. It manufactures ready mix concrete (RMC). The company has 5 integrated plants, 6 grinding units and 3 terminals: 2 in India and 1 in Sri Lanka. It is an exporter of cement clinker to the countries around the Indian Ocean, Africa, Europe and the Middle East. The Company's subsidiaries include Dakshin Cement Limited, UltraTech Cement Lanka (Pvt.) Ltd. and UltraTech Cement Middle East Investments Limited.

Investment Rationale

Expansion on track: As per the company’s long term strategy it is setting up additional clinkerisation capacity by 4.8 MT at Raipur, Chhattisgarh and by 4.4 MT at Malkhed, Karnataka, the combined additional capacity would amount to 9.2MTPA. The capital expenditure on the new clinkerisation plants, grinding units & bulk packaging terminals across various states is estimated at Rs. 5,600 crore. The capital expenditure (capex) will be funded through a mix of internal accruals and borrowings. As per the schedule, the project is expected to come on stream from FY2014. Since the project is expected post FY13 it is not incorporated in the volume growth estimates.

Concerns regarding margin pressure: The cement industry is expected to grow at 8-9% from FY2012 on account of initiatives taken by the government to boost infrastructure, housing activity and also rural development. However, the upcoming capacity will be creating surplus capacity and cement prices are likely to come under pressure. Further, the cost inflation in terms of higher coal prices will also continue to pressure margins in the coming quarters.

Outlook & Valuation: I like Ultratech for its diversified model & its all India presence along with its strong balance sheet. On the acquisition of Star Cement by Ultratech provided an access in growing markets like Bangladesh, Dubai, Sudan, and Bahrain. However, on account of the anticipated pressure on cement prices in the coming one year and in terms of rising coal prices, I see limited upside in the stock price from the current levels, I give Buy recommendation on the stock with a price target of Rs.1, 150. At the current market price, the stock trades at a PE of 20.2x FY2012E. On an EV/EBITDA basis, the stock trades at 9.9x FY2012E.

Result Update: Ultratech Cement’s financials for Q4 & FY11 are not comparable due to merger of Samruddhi Cements with itself. Dispatches stood at 10.68MT for Q4FY11, for full year 2011, it stood at 32.76 MT. Adjusted with white cement, wall care putty and RMC revenues, grey cement realizations stood at Rs. 3,577/ tonne during Q4FY11 v/s Rs. 3,279 in Q3FY11. Blended realizations during Q4FY11 were Rs. 4,204/ ton is much higher than pure grey cement realizations. Margins stood at 22.7% & 19.2% for Q4FY11 and FY11 respectively.  BITDA/Tonne for Q4FY11 stood at Rs. 956. Overall costs continued to remain high due to increase in raw material, coal and freight expenses, so EBITDA/tonne of Rs. 886 is expected for FY12.

KEY FINANCIALS	FY10	FY11E	FY12E
SALES (Rs. crs)	7,049.7	13,209.9	17,114.5
NET PROFIT (Rs. crs)	1,093.2	1,404.2	2,023.7
EPS (Rs.)	87.8	51.2	73.9
PE (x)	11.7	20.7	14.30
P/BV (x)	2.8	2.8	2.3
EV/EBITDA (x)	6.4	11.9	7.7
ROE (%)	26.6	14.3	17.7
ROCE (%)	28.5	14.5	20.1

I maintain my buy status on Ultra tech Cement with the price target of Rs. 1050 in short term. For long term my target is of Rs. 1150. As I always say do respect the market and keep a strict stop loss of 8 % on your every purchase.

INDRAPRASTHA GAS: Accumulate on every dip.Better positioned,Good stock.

Scrip Code: 532514 / IGL

CMP:  Rs. 337.45; Buy at Rs. 310-325.
Short term Target: Rs. 350, LT – Rs. 450. 

Market Cap: Rs. 4,724.30 cr. 52 Week High/Low: Rs. 374.00 / Rs. 256.70. Total Shares: 14,00,00,160 shares; Promoters : 6,30,00,080 shares –45.00 %; Total Public holding : 77,00,00,080 shares –55.00 %; Book Value: Rs. 58.96; Face Value: Rs. 10; EPS: Rs. 17.29; Div: 45 %. P/E: 19.49 times; Ind P/E: 20.88; EV/EBITDA: 11.59.

Total Debt: Rs. 55.16 cr; Enterprise Value: Rs. 4,694.06 cr

Indraprastha Gas Ltd was incorporated in 1998, provides natural gas for automobile, domestic & commercial use in Delhi, India. The company is a joint venture of GAIL (India) Limited, Bharat Petroleum Corporation Limited & the Government of the National Capital Territory of Delhi. The company is the supplier of Compressed Natural Gas (CNG) to the automotive sector in the National Capital Territory of Delhi (NCT of Delhi). As on March 31, 2010, the company operated 241 CNG stations, provided PNG to 1,82,000 domestic & 355 commercial customers.  The company also markets and distributes Piped natural Gas (PNG) for domestic and commercial users in NCT of Delhi. As on March 31, 2010, the Company is supplying Re-LNG to 21 industrial consumers in Delhi. PNG was supplied to the domestic and commercial sectors in the areas of Kaka Nagar, Bapa Nagar, Pandara Road, Pandara Park, Sunder Nagar and Sujan Singh Park. BPCL holds 3,15,00,080 shares (22.5 %) & GAIL holds 3,15,00,000 shares (22.5 %) in Indraprastha Gas Limited.

Investment Rationale

Demand still robust in NCT of Delhi and NCR for CNG: Compressed Natural Gas (CNG) volumes (90% of total volumes) grew at a CAGR of 15% between FY07-10 led by private car conversions due to favorable pricing of CNG. Considering the beneficial pricing scenario (CNG being 67% cheaper than petrol and 36% than diesel) as well as robust CNG demand in the operational areas, it is expected that CNG volumes to grow at 18% Y-o-Y from FY10 to FY13. With a view to cater to the increasing demand, IGL plans to add 40 CNG stations by FY11 (241 stations in FY10) and 30 CNG stations in FY12 and FY13 each.

PNG segment set to become the next growth driver: The Piped Natural Gas (PNG) segment which includes the relatively under penetrated domestic households and industrial/commercial customers is expected to be the key catalyst for growth going forward. On the back of strong volume growth from the relatively high margin industrial segment, it is expected that PNG volumes to grow from 87 MMSCM in FY10 to 398 MMSCM by FY13 (CAGR of 66%).

End of Marketing Exclusivity should not pose a hurdle in Delhi: The biggest entry barrier for any new player in CGD business in Delhi is the non-availability of cheap gas (APM gas or KG-D6) gas. The government has allotted 2 MMSCMD of gas to IGL for their Delhi operation which is currently utilized fully. In the event of the government increasing the allocation of APM or KG-D6 gas in Delhi, IGL would get first preference over any new player with its already established network in Delhi.

Ability to pass on high input costs: Historically, IGL has consistently been able to pass on cost increases by way of price hikes of CNG which helped in sustaining its margins. With blended cost of gas expected to be Rs 13.16 per SCM in FY13 as compared to Rs 5.96 per SCM in FY10, gradual price increases (recently hiked prices by Rs. 1.25 per SCM with effect from Jan 1, 2011) would be a key to sustain its margins. With petrol and diesel prices expected to increase going forward, it is believed that IGL should not find it difficult to pass on cost increases by way of price hikes.

Outlook & Valuation: The correct measure to evaluate operating performance for the Consumer Gas Distribution business is at EBITDA level. Drived by robust demand in the CNG segment and increasing revenues from PNG segment led by industrial volumes, IGL’s revenues to grow at an AGR of 45% over FY10-13E. The aggressive expansion plans for establishing the CNG and PNG infrastructure in the operational areas of IGL will reap rich dividends going forward. At current market price of Rs. 300 the stock trades at a P/E of 14.3x and 11.6x for FY12E and FY13E respectively. It will be a good BUY on IGL with a price target of Rs. 350/share.

KEY FINANCIALS	FY09	FY10	FY11E	FY12E	FY13E
SALES (Rs. crs)	852.80	1,078.10	1,723.00	2,414.70	3,304.20
NET PROFIT (Rs. crs)	172.50	215.50	254.30	293.40	363.50
EPS (Rs.)	12.30	15.40	18.20	21.00	26.00
PE (x)	24.40	19.50	16.50	14.30	11.60
P/BV (x)	6.10	5.10	4.20	3.40	2.80
EV/EBITDA (x)	13.60	10.90	8.90	7.40	6.00
ROE (%)	25.20	26.10	25.30	23.90	24.00
ROCE (%)	40.30	43.30	34.80	33.00	35.10

I maintain my accumulation status on IGL with the price target of Rs. 350 in short term. For long term my target is of Rs. 450. As I always say do respect the market and keep a strict stop loss of 8 % on your every purchase.

Tata Steel Ltd : ACCUMULATE on every dip.

Scrip Code: 500470 / TATASTEEL

CMP:  Rs. 614; Buy at Rs.590 - 610.00;
Short term Target: Rs. 680.00, LT – Rs. 750;Market Cap: Rs. 58,895.76 Cr;52 Week High/Low: Rs. 737.00 / Rs. 449.10;Total Shares: 95,92,14,450 shares; Promoters : 29,34,92,790 shares –30.60 %; Total Public holding : 66,57,21,660 shares –69.40 %;Book Value: Rs. 388.24; Face Value: Rs. 10; EPS: Rs. 76.32; Div: 80 %;P/E: 8.05 times; Ind P/E: 11.44; EV/EBITDA: 8.29.

Total Debt: Rs. 27,287.73 Cr; Enterprise Value: Rs. 90,962.30 Cr.

Tata Steel Limited was established by Mr. Jamsetji Nusserwanji Tata in 1907. It was formerly known as The Tata Iron and Steel Company Limited and changed its name to Tata Steel Limited in 2005. Tata Steel Limited is a diversified steel producer. It has a global presence in 50 markets and manufacturing operations in 26 countries. The Company provides steel for different industries, which include construction, automotive, aerospace, consumer goods, materials handling, energy and power, rail, engineering, shipbuilding, packaging, and security and defense. Tata Steel manufactures and processes steel, which includes hot-rolled coil through to high-gloss, pre-painted perforated blanks, wire rod and wire, sections, plate, bearings and tubes.  Its major branded products are Tata Steelium, Tata Shaktee, Tata Tiscon, Tata Pipes, Tata Bearing and Tata Agrico. On 20 October 2009, TATA STEEL won bid to acquire Anglo – Dutch steelmaker CORUS at $7.6 billion. On January 30, 2007, Tata Steel purchased a 100% stake in the Corus Group at 608 pence per share in an all cash deal, totally valued at USD 12.04 Billion. The deal is the largest Indian takeover of a foreign company and made Tata Steel the world's fifth-largest steel group.

Domestic operation to remain out performer

Tata Steel India has been showing robust performance and the management is very confident that it would continue to out performer with lower cost of production due to good backward integration and strong growth in domestic demand. The company should see a volume of 1.68 million tonnes during Q4FY11. For FY12 it expects a volume of 6.8 mt from the domestic operation, which suggests the 2.9 mtpa brown field expansion in Jamshedpur to add primarily to FY13 volume. The expansion project is on track and the blast furnace is likely to be commissioned by August 2011 itself. Orissa project also has been kicked off with basic civil works etc. Tata Steel has been focusing to increase its market share in value added categories. JV with Nippon Steel and Bluescope steel, setting up of CR mill in Tinplate Company etc are steps in that direction.

Overseas operations likely to stabilize going forward

Concerns still remain on the overseas operations especially in the South East Asian markets. Low difference between scrap and rebar prices has been a concern for Nat Steel, while lack of major spending by the government, political stability along with higher raw material costs have been putting pressure on Thailand operations. The management however feels things to be stabilized in the coming quarters. TSE on the other hand should not see much improvement in EBITDA/ tonne during Q4FY11, however, the incremental impact of the price hike should help it to post much better numbers during Q1FY12. For FY12 TSE is likely to post a volume of 15 mt.

Riversdale mining has been a strategic investment for Tata Steel. The company currently has 27.1% stake in Riversdale which is valued at Rs.4796 Cr (Rs.50/sh) and is not in the process of selling any stake. New Millennium DSO project is likely to start operation in Q2FY12. In FY13 the company is likely to get 2 mt iron ore. Consolidated debt position remains above US$11bn and the management does not expect that amount to go up significantly. Further money rising of Rs 2000- 2500 Cr can be done through (click) perpetuity bonds.

Outlook and Valuations

At the CMP of Rs. 614, the stock is trading at 8x its FY12E EPS and 5x FY12E EV/ EBITDA. It is believed that the domestic operation would continue to perform well due to better demand and stronger backward integration. On the overseas subsidiaries, the value of domestic operation comes at 6.5x FY12 EV/ EBITDA and overseas subsidiaries at 4x FY12 EV/ EBITDA to reach a fair value of Rs 695/ share. Domestic operations to be the backbone for the company due to better backward integration and strong demand growth expected in India. Price hike during January to March period across different product categories in various stages should improve the EBITDA/ tonne for Q4FY11. Concerns remain on overseas operations due to higher costs. Volume is likely to be higher from Tata Steel Europe (TSE), however, not for the South Asian operations. Factoring in the concerns the FY11 and FY12 EPS comes to Rs 58.7 and Rs 62.0 respectively. Target price to Rs 695/ share; A ACCUMULATE on the stock.

KEY FINANCIALS	FY09	FY10	FY11E	FY12E
SALES (Rs. crs)	1,47,329.3	1,02,393.1	1,13,064.8	1,20,086.7
NET PROFIT (Rs. crs)	9,045.4	(643)	6,068	6,405
EPS (Rs.)	104.1	(6.8)	58.7	62.0
PE (x)	4.4	--	10.8	10.3
P/BV (x)	1.6	2.4	1.8	1.4
ROE (%)	26.4	--	18.8	16.0
ROCE (%)	13.7	--	9.7	9.9

I have accumulation status on TATASTEEL with the price target of Rs. 680 in short term. For long term my target is of Rs.750. As I always say do respect the market and keep a strict stop loss of 8 % on your every purchase.