ULTRA TECH CEMENTS: CEMENTING STRONGLY AHEAD !!!

Scrip Code: 532538 / ULTRACEMCO

CMP:  Rs. 1837.75; Buy at every dips.
Medium to Long term Target: Rs. 2066; STOP LOSS – Rs. 1690.73; Market Cap: Rs. 50,369.81 Cr; 52 Week High/Low: Rs. 2154.20 / Rs. 1212.05

Total Shares: 27,40,84,137 shares; Promoters : 17,36,05,057 shares –63.34 %; Total Public holding : 10,04,79,080 shares – 36.66 %; Book Value: Rs. 469.06; Face Value: Rs. 10.00; EPS: Rs. 102.00; Div: 80.00 % ; P/E: 18.17 times; Ind. P/E: 19.84; EV/EBITDA: 10.02.

Total Debt: 3,808.13 Cr; Enterprise Value: Rs. 54,177.94 Cr.

ULTRATECH CEMENT LIMITED: ULTRACEMCO was incorporated in 2000 and is based in Mumbai, India. It was formerly known as Ultra Tech Cemco Limited and changed its name to ULTRATECH CEMENT Ltd on October 2004. It’s a subsidiary of Grasim Industries Ltd from Aditya Birla Group. The Company is engaged in the business of cement and cement related products. It manufactures and markets Ordinary Portland Cement, Portland Blast Furnace Slag Cement and Portland Pozzalana Cement. UltraTech Cement Limited, together with its subsidiaries, primarily engages in the manufacture and sale of cement in India and internationally. Its products include ready mix concrete; building products, including waterproofing solutions, polymer modified mortar, lightweight autoclaved aerated concrete blocks, thin layer jointing mortar, and ready mix plaster; and white cement. The Company also manufactures ready mix concrete (RMC). UltraTech Cement is an exporter of cement clinker. The Company has an annual capacity of 23.1 million tons. The Company has 11 integrated plants, one white cement plant, one clinkerisation plant in the United Arab Emirates, 15 grinding units - 11 in India, two in the United Arab Emirates, one in Bahrain and Bangladesh each and five terminals - four in India and one in Sri Lanka. In the 2011, its wholly owned subsidiary, UltraTech Cement Middle East Investments Limited (UCMEIL) acquired ETA Star Cement together with its operations in the United Arab Emirates, Bahrain and Bangladesh and acquired management control. On July 1, 2010, Samruddhi Cement Limited (Samruddhi) amalgamated with the Company.  The Company's subsidiaries include Dakshin Cement Limited, UltraTech Cement Lanka (Pvt.) Ltd. and UltraTech Cement Middle East Investments Limited. The company is compared to Ambuja Cements Ltd, ACC Limited and Rain Commodities Limited domestically.

Investment Rationale:

Ultratech Cement Limited is India's largest manufacturer of cement with an installed capacity of 52 Million Tonnes Per Annum. Ultratech’s massive 10 mtpa capacity addition program is nearing completion. The 1 mtpa Surat grinding unit is expected to be commissioned by 4QFY13. Ultratech board has sanctioned an additional capex of Rs. 1000 Cr towards modernization and setting up of Ready Mix Concrete (RMC) plants across the country. This brings the total capex under implementation to about Rs. 11400 Cr. The Company has entered into a Share Purchase Agreement with the shareholders of Gotan Limestone Khanij Udyog Pvt. Ltd (GKU) and has acquired GKU’s entire equity stake. Consequently, GKU has become a wholly owned subsidiary of the Company with effect from July 23^rd, 2012. Through this acquisition Ultratech is looking to enhance its white cement capacity. Ultratech’s revenues for Q3FY13 improved by 6 % YoY led by improvement in cement realizations. However, on a sequential basis, cement realizations witnessed a marginal decline. An average cement prices at the end of Q3FY13 witnessed a correction sequentially and stood at Rs. 284/bag. Correspondingly, company's realizations (including RMC) during Q3FY13 stood at Rs. 4690 per tonne as against Rs. 4760 per tonne during Q2FY13 adjusting with white cement, wall care putty and cement export revenues. The combined grey cement and clinker sales volume stood at 9.62 MT during Q3FY13 as against 9.7 MT during Q3FY12. Export cement and clinker volumes stood at 0.32 MT at approx. price of $55/tonne for cement and approximately $45/tonne for clinker. Company is in the process of setting up 4.8 MT plant at Raipur, Chattisgarh and 4.4 MT plant at Malkhed, Karnataka along with a captive power plant of 75 MW and waste heat recovery plant of 45 MW. These new capacities are likely to get operational by mid FY14. The company is expected to dispatch about 41 MT for FY13 translating into revenues of around Rs. 20,000 Cr for FY13 & for FY14 the estimates for volumes are expected to grow to 48.9 MT with expected revenues of Rs. 25,500 Cr for FY14. 

Outlook and Valuation:

Ultratech's revenues for Q3FY13 improved by 6 % YoY led by improvement in cement realizations. However, on a sequential basis, cement realizations witnessed a marginal decline. Company’s operating margin for Q3FY13 remained same on yearly basis despite the higher cost and improvement in cement prices. The Net profit performance was boosted by strong operating margins and higher other income. UltraTech’s average realizations were up 8 % YoY to Rs. 4,760 per ton. At 10.2 m tons, volumes for grey cement, clinker, white cement & wall putty dipped by 1.5 % YoY but up 7.1 % QoQ. Grey cement sales were up by 7.1 % QoQ which are in line with the industry growth rate. RMC recorded revenue of Rs. 500 Cr up by 47 % YoY and white cement and wall putty recorded Rs. 400 Cr up by 18 % YOY. Ultra Tech’s Average EBITDA/ton stood at Rs. 1,005/ton. The increase in the price of diesel and railway freight mainly led to an 18 % YoY rise in raw material cost and a 7 % YoY rise in freight. Benefit of softening coal prices was partly offset by the rupee depreciation against the dollar, leading only to a minor dip of 2 % YoY in power & fuel costs per ton. Company’s higher other income also boosted Profit after Tax growth of 9 % YoY. Company’s management expects cement demand to grow over 8 % in the long term even as the surplus scenario will continue in next three years. The two new units at Chattisgarh and Karnataka are likely to start by early FY14, taking total capacity to 59.5m tons. During 3QFY13, the Ministry of Coal, de-allocated the company’s coal block (allocated jointly with a JV partner) in Chattisgarh. The company has filed against the order and obtained a stay in this regards. The Competition Commission of India (CCI) has slapped 11 cement companies with a fine of Rs. 6,714.83 crore for price cartelisation, the highest penalty ever imposed by the fledgling, but increasingly assertive, anti-trust regulator. 11 firms were found guilty of price rigging. These 11 firms include ACC, Ultratech Cement, Grasim Cement (now a part of Ultratech), Jaypee Cements, Lafarge India, Jk Cements, India Cements, Madras Cement, Century Cements, Binani Cements and Ambuja Cements. The Industry body Cement Manufactures Association has also been fined. These 11 firms and the association are drawing up plans to question the legality of the case when it comes up for hearing before the Competition Appellate Tribunal (COMPAT the 3 member tribunal) on 29 January 2013. In any case any adverse decision would mean the blow of Rs.1175.40 Cr on Ultratech which is 6 % - 7 % of its total sales. Cement prices rose to all time high of Rs.330/bag in middle of 2012, & looking at the strong recovery going forward cement company will be have boost in their profitability. The clarity on the CCI investigation report should be a major trigger for the stock. At current price of Rs. 1837.75, the stock is trading at 19.2 x P/E on estimated EPS of Rs. 95.30 for FY13E and 16 X P/E on the estimated EPS of Rs. 114.80 for FY14E. Ultratech Cements is a good buy at the current market price & one can ACCUMULATE the stock and is advised to use declines in the stock to buy with a long term view with a target price of Rs. 2066.00 for Medium to Long term investment.

KEY FINANCIALS	FY12	FY13E	FY14E	FY15E
SALES (Rs. Crs)	18,158.30	20,705.50	24,384.50	29,484.40
NET PROFIT(Rs. Crs)	2,369.60	2,611.40	3,147.00	3,850.00
EPS (Rs.)	86.50	95.30	114.80	140.50
PE (x)	22.10	20.00	16.60	13.60
P/BV (x)	4.10	3.50	3.00	2.50
EV/EBITDA (x)	13.10	11.40	8.90	6.80
ROE (%)	20.10	18.60	19.00	19.60
ROCE (%)	17.60	18.00	19.50	21.20

I would buy UltraTech Cements LTD with a price target of Rs. 2066 for Medium to Long term. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 1690.73 on every purchase. 

*As the author of this blog I disclose that I do hold Ultra tech Cements LTD in my investment portfolio.

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