UltraTech Cement Ltd

INVESTMENT RATIONALE

UltraTech Cement has a current cement capacity of 21.9 mn tonnes per annum which would increase to 23.1 mn tonnes per annum by FY10, making it one of India's largest cement company. Based on its production for FY09 it had a domestic market share of ~10%. Based on its plant locations its main markets are in east, west, and south India.

Its markets are well spread out. UltraTech has been known for consistent high quality of its cement and is able to earn a premium price over other cement brands in several markets

Key Developments

Dispatches and Realization – Volumes have improved 4.5% y-o-y from 3.98 mn tonnes to 4.16 mn tonnes in the current quarter, this is mainly due to major development in residential and infrastructural projects compared to last year. Realization improved by Rs. 196 per tonne y-o-y and Rs.33 per tonne q-o-q to Rs.3704 per tonne due to steady cement prices and higher consumption. Net profit per tonne has increased by 49.2% from Rs. 404 to Rs. 603 per tonne mainly due to reduction in cost and better realization in the quarter. We expect
realizations to fall in the coming quarters.

Valuations

At current price of Rs 772 the stock is trading at 5.9x EV/EBIDTA on FY10E and 8.3x on its FY10E EPS of Rs. 92.9. With the government initiative to boost rural development and infrastructure, and revival in residential segment has created enough opportunities for the cement players. However, capacity addition plans of various companies will put pressure on the cement prices going forward. Ultratech has a good presence in the southern region where maximum capacity addition is coming up in the next quarters. We expect Ultratech margins to fall but volumes are bound to increase due to huge infrastructural projects in pipeline and residential property revival. Also the company is focusing on higher volume growth, captive power generation and capital productivity should partially offset the impact on margins.

We thus recommend a HOLD to the company’s stock with a target price of Rs 840, which represents a potential upside of 8.8%.

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