UltraTech Cement (ULTCEM) - ICICI Direct - Moneycontrol.com

Result Update January 20, 2014 Rating matrix

UltraTech Cement (ULTCEM)

Rating

:

Buy

Target

:

| 2040

Target Period

:

12-15 months

Potential Upside

:

19%

| 1720 WHAT’S CHANGED… PRICE TARGET....................................................................................................Unchanged

Key Financials | Cr

FY12

FY13

FY14E

FY15E

EPS (FY14E)......................................................................... Changed from | 76.3 to | 63.8

18183.6

20020.9

19708.7

23074.0

EBITDA

3998.7

4522.8

3435.2

4710.6

EPS (FY15E).................................................................... Changed from | 101.9 to | 102.2

Net Profit

2446.2

2655.6

1749.2

2801.7

89.2

96.8

63.8

102.2

FY12

FY13

FY14E

FY15E

Net Sales

EPS (|)

Valuation summary PE (x)

19.3

17.7

26.9

16.8

Target PE (x)

22.9

21.1

32.0

20.0

EV to EBITDA (x)

12.0

10.6

13.9

10.0

EV/Tonne(US$)

149

148

124

122

Price to book (x)

3.7

3.1

2.8

2.4

RoNW (%)

19.0

17.4

10.2

14.2

RoCE (%)

18.6

18.7

11.1

15.2

Stock data Mcap

| 47,135 crore

Debt (FY13)

| 3,896 crore

Cash & Invest (F Y13)

| 3269 crore

EV

| 47,761 crore

52 we ek H/L

| 2154 / 1402

Equity ca p

| 274.2 crore

Face value MF Holding(%)

| 10

FII Holding(%)

21.0

4.6

Price movement 6,500

2,100 1,900 1,700 1,500 1,300 1,100 900 700 500

6,000 5,500 5,000 4,500 4,000 Jan-13

Apr-13

Jul-13

Price (R.H.S)

Oct-13

Jan-14

Nifty (L.H.S)

Analyst’s name Rashesh Shah [email protected] Darpan Thakkar [email protected]

RATING....................................................................................... Changed from Hold to Buy

High operating costs weigh on bottomline… Going by the weak industry trend, UltraTech reported subdued Q3FY14 numbers. While revenues at | 4,786 crore were marginally lower than our estimates, EBITDA/tonne of | 765/tonne was below our estimate of | 843/tonne owing to higher cost increases led by a hike in freight rates and higher raw material costs. As a result, EBITDA of | 764.2 crore and PAT of | 369.8 crore were below our estimates of | 862.7 crore and | 383.2 crore, respectively. Cement sales volumes continued came in weak (flat YoY, up 6.5% QoQ), which also led to a fall in realisations (down 2.5% YoY). On the other hand, high raw material (up 23% YoY led by inventory adjustment of | 100 crore in Q3FY13) and freight cost (up 5.7% led by hike in railway freight from October 2013 onwards coupled with higher fuel prices) led to lower EBITDA of | 765/tonne (down 26% YoY, up 8.7% QoQ). Although we expect margins to remain under pressure in the near term due to high cost environment, there is room for cost reduction in freight and other costs, going forward, owing to a decline in lead distances and operating leverage benefit through expansions. Well on track in capacity expansion The company has consistently remained ahead of its peers in terms of capacity expansion with CAGR of 23% vs. peer’s CAGR of 13% over the past five years. After commissioning of the 1.6 MT grinding unit at Odisha, we expect capacity of 2.85 MT to be commissioned during H2FY14E. Also, 2.85 MT combined with 4.8 MT capacity of the recently acquired Gujarat unit of Jaypee Cement would result in total capacity of 63.2 MTPA at the end of FY14E, which is ahead of the guidance given by the company for FY14E. Strong balance sheet to eclipse near term challenges Being a debt free company even after Jaypee’s Gujarat cement plant acquisition, the company is well positioned to withstand the slowdown and generate healthy free cash flows in future. The stock is currently trading at 13.9x and 10.0x EV/EBITDA for FY14E and FY15E, respectively, against last three year’s average valuations of 13.0x. Hence, we maintain our target price of | 2040/share (i.e. valuing at 12.0x FY15E EV/EBITDA). Exhibit 1: Financial Summary (| Crore) Net Sales EBITDA EBITDA Ma rgin (%) Depreciation Interest Other Income Reported PAT EPS (|)

Q3FY14 4786.4 764.2 16.0 264.5 90.5 99.6

Q3FY14E 4825.1 862.7 17.9 271.9 88.8 57.4

Q3FY13 4857.4 1024.3 21.1 238.8 52.1 121.2

Q2FY14 4502.1 659.7 14.7 257.3 88.8 57.4

QoQ (Chg %) 6.3 15.8 131 bps 2.8 1.9 73.6

YoY (Chg %) -1.5 -25.4 -512 bps 10.8 73.6 -17.8

369.8 13.5

383.2 14.0

600.9 21.9

264.1 9.6

40.0 40.0

-38.5 -38.5

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

Flat volume and low realisations led by slowdown coupled with higher operational costs lead to ~26% drop in EBITDA/tonne Net sales for the quarter declined 1.5% YoY to | 4786.4 crore due to muted sales volume and weak realisations. Volumes increased by mere 1.1% to 10 MT while realisation declined 2.5% to | 4792/tonne. On the cost front, cost of raw material per tonne increased 21.7% YoY on account of lower base of Q3FY13 when the company took inventory adjustment of ~| 100 crore. Freight cost and other costs increased 4.6% and 6.0%, respectively, on a per tonne basis due to a hike in railway tariff from October 2013. On the other hand, the power cost declined 8.4% per tonne due to a favourable change in the fuel mix and fall in coal prices by nearly 4-5%. As a result, total expenditure increased 3.8% YoY on a per tonne basis that led to 26.2% YoY decline in EBITDA/tonne to | 765/tonne. Exhibit 2: Per tonne analysis | crore

Q 3FY14

Q3FY13

YoY (%)

Q2FY14

QoQ (%)

10.0

9.9

1.1

9.4

6.5

Sales Volume

Blended cement volumes (accounting for grey and white cement including clinker sales) were flat at 10 MT while

Net Realisation

4792

4915

-2.5

4802

-0.2

Total Expenditure

4027

3879

3.8

4099

-1.8

Raw material

818

672

21.7

807

1.3

Power & F uel

1003

1096

-8.4

1020

-1.7

Freight

EBITDA/tonne was lower by ~26.2% YoY

1121

1071

4.6

1061

5.7

Employees

245

247

-1.1

303

-19.4

Others

840

793

6.0

907

-7.4

EBITDA pe r Tonne

765

1037

-26.2

704

8.7


11.8

10.2

9.9

9.3

11.3

Exhibit 4: Realisation declines 2.5% to | 4792 4992 5054

5200

10.1

9.4

10.0

5000 4800 (|)

10.4

4600 4400

4915

4775

4895

4802 4792

4523

4375

4200

Sales Volume

Q3FY14

Q2FY14

Q1FY14

Q4FY13

Q3FY13

Q2FY13

Q1FY13

Q4FY12

Q3FY12

Q3FY14

Q2FY14

Q1FY14

Q4FY13

Q3FY13

Q2FY13

Q1FY13

4000

Q4FY12

14 12 10 8 6 4 2 0

Q3FY12

Million Tonne

Exhibit 3: Sales volume for the quarter almost flat at 10 MT

Realisation


Exhibit 5: EBITDA per tonne declines 26.2% to | 765/tonne

Exhibit 6: EBITDA margin declines 512 bps YoY but improves QoQ

1271 923

1071

30

1083 1037 1063 1036

25 20

765 (%)

704

21.1

23.7

25.5

21.4

21.1

22.3

21.2

15

14.7

10 5

EBITDA per Tonne



Q3FY14

Q2FY14

Q1FY14

Q4FY13

Q3FY13

Q2FY13

Q1FY13

Q4FY12

Q3FY12

Q3FY14

Q2FY14

Q1FY14

Q4FY13

Q3FY13

Q2FY13

Q1FY13

0 Q4FY12

1400 1200 1000 800 600 400 200 0

Q3FY12

| per tonne


EBITDA Margin


Page 2

16.0

Capacity expansion on track The company recently commissioned 25 MW TPP at Rajashree Cement in Karnataka. Its 1.6 MT cement mill at Odisha also went on stream from October 2013 onwards. Clinkerisation capacity of 3.3 MT at Malkhed, Karnataka was commissioned during Q1FY14. After commissioning of 1.6 MT at Odisha, we expect another capacity of 2.85 MT to be commissioned during H2FY14E. The 2.85 MT combined with 4.8 MT capacity of the recently acquired Gujarat unit of Jaypee Cement would result in total capacity of 63.2 MTPA at the end of FY14E, which is ahead of the guidance given by the company for FY14E. Exhibit 7: Capacity expansion plan Opening Additions Closing

Clinker

Grey Cement

White Cement

39.5

53.9

5.6

Q1FY14

3.3

-

-

Q2FY14

-

1.6

-

H2FY14* (Planned)

-

7.7

-

42.8

63.2

5.6

FY13

FY14

Source: Company, ICICIdirect.com Research * Includes Jaypee cement’s Gujarat plant with 4.8MT capacity

Valuations compelling post recent correction The company is well on track on the capacity expansion front and will likely remain ahead of its target of 62 MT by FY14 (including the Jaypee deal). However, the full impact of the capacity expansion would be seen after full stabilisation in FY15E. Considering this, we expect volume growth CAGR of 7.0% during our forecast period of FY13-15E. We expect the blended realisation to remain subdued in FY14E and increase moderately in FY15E by ~2.0% YoY on account of sustained discipline by producers and an expected pick-up in demand. We estimate blended EBITDA/tonne at | 845/tonne (previous | 959/tonne) in FY14E and | 1013/tonne (previous | 974/tonne) in FY15E. At the CMP of | 1718, the stock is trading at 26.9x and 16.8x its FY14E and FY15E earnings, respectively. It is trading at an EV/EBITDA of 13.9x and 10.0x FY14E and FY15E EBITDA, respectively. On an EV/tonne basis, the valuations have come down to $122 vs. $141 on its capacity of ~64 MT (in line with current replacement cost without assigning any premium with respect to leadership) that leaves room for upside once demand improves. Hence, we maintain a target price of | 2040 (i.e. valuing at 12.0x FY15E EV/EBITDA) and upgrade our rating to BUY from HOLD. Exhibit 8: Key Assumptions | crore Sales Volume**

FY11*

FY12

FY13

FY14E

FY15E

35.7

41.5

40.6

40.7

46.5

Net Realisation**

3703

4379

4927

4847

4963

Total Expenditure

2991

3416

3814

4002

3950

Raw material

489

576

688

801

790

Power & Fuel

875

1036

1058

1000

1050

Freight

717

830

1039

1101

1050

Employees

186

200

238

258

260

Others

723

774

791

842

800

EBITDA per Tonne

713

963

1113

845

1013

Source: Company, ICICIdirect.com Research *FY11 reflects ex-Samruddhi cement numbers; i.e. pre merger ** Blended (grey + white + clinker)


Page 3

Financial summary Profit and loss statement

Cash flow statement (| Crore)

(Year-end March) Total operating Income Growth (%) Raw material cost

FY12

FY13

FY14E

FY15E

18,183.6

20,020.9

19,708.7

23,074.0

(| Crore) (Year-end March) Profit after Tax

37.7

10.1

-1.6

17.1

2393.7

2796.8

3258.5

3672.7

Add: Depreciation (Inc)/dec in Current Assets

FY12

FY13

FY14E

FY15E

2,446.2

2,655.6

1,749.2

2,801.7

902.6

945.4

1,099.0

1,185.6

-1,821.5

-94.2

189.8

-2,358.6

Power & Fuel cost

4300.4

4298.9

4065.3

4881.4

Inc/(dec) in CL and Provisions

1,119.4

1,799.0

-1,121.9

422.6

Freight cost

3446.3

4219.8

4477.2

4881.4

CF from operating activities

2,646.7

5,305.7

1,916.0

2,051.2

Employees cost Others Total Operating Exp. EBITDA

832.0

968.4

1047.4

1208.7

(Inc)/dec in Investments

1,089.4

-486.0

0.0

0.0

3212.5

3214.4

3425.0

3719.2

(Inc)/dec in Fixed Assets

-1,928.1

-4,042.3

-2,030.0

-1,100.0

14,184.8

15,498.2

16,273.5

18,363.4

3,998.7

4,522.8

3,435.2

4,710.6

Growth (%)

57.3

13.1

-24.0

37.1

Depreciation

902.6

945.4

1,099.0

1,185.6

Others CF from investing activities Issue/(Buy back) of Equity Inc/(dec) in loan funds

7.7

168.2

0.0

0.0

-831.0

-4,360.2

-2,030.0

-1,100.0

-4.8

0.0

0.0

0.0

-372.3

123.2

100.0

-500.0 -192.5

Interest

227.9

209.7

335.7

255.2

Dividend paid & dividend tax

0.0

-288.7

-192.5

Other Income

524.6

457.8

444.9

790.6

Inc/(dec) in Sec. premium

0.0

0.0

0.0

0.0

3,392.8

3,825.5

2,445.4

4,060.5

Others

-248.0

8.2

316.8

0.0

946.7

1170.0

696.2

1258.7

CF from financing activities

-625.1

-157.2

224.3

-692.5 258.7

PBT Total Tax PAT

2,446.2

2,655.6

1,749.2

2,801.7

Net Cash flow

42.8

-45.7

110.3

Growth (%)

74.2

8.6

-34.1

60.2

Opening Cash

145.2

188.0

142.3

252.6

Adjusted EPS (|)

89.2

96.8

63.8

102.2

Closing Cash

188.0

142.3

252.6

511.4

FY13

FY14E

FY15E

Source: ICICIdirect.com Research


Balance sheet

Key ratios (| Crore)

(Year-end March)

FY12

FY13

FY14E

FY15E

(Year-end March)

FY12

Per share data (|)

Liabilities 274.1

274.1

274.1

274.1

89.2

96.8

63.8

102.2

Reserve and Surplus

12,585.6

14,960.7

16,834.1

19,443.3

Cash EPS

122.1

131.3

103.9

145.4

Total Shareholders funds

719.1

Equity Capital

EPS

12,859.6

15,234.7

17,108.2

19,717.4

BV

469.0

555.6

623.9

Total Debt

3,772.3

3,895.5

3,995.5

3,495.5

DPS

0.0

9.0

6.0

6.0

Deferred Tax Liability

1,737.8

1,905.9

1,905.9

1,905.9

Cash Per Share

6.9

5.2

9.2

18.7

Minority Interest / Others Total Liabilities

0.0

0.0

0.0

0.0

18,369.7

21,036.2

23,009.6

25,118.9

Assets Gross Block Less: Acc Depreciation Net Block Capital WIP

Operating Ratios (%) EBITDA Margin

22.0

22.6

17.4

20.4

PBT / Total Operating income

18.7

19.1

12.4

17.6

PAT Margin

13.5

13.3

8.9

12.1 38.0

18,725.4

22,767.7

25,467.7

26,567.7

Inventory days

40.1

40.0

39.0

7,444.6

8,390.0

9,489.0

10,674.5

Debtor days

13.7

16.3

17.0

15.0

11,280.8

14,377.7

15,978.8

15,893.2

Creditor days

67.8

83.6

88.0

70.0 14.2

Return Ratios (%)

2,250.0

2,250.0

1,580.0

1,580.0

13,530.8

16,627.7

17,558.8

17,473.2

RoE

19.0

17.4

10.2

Investments

3,788.8

5,108.7

5,108.7

5,108.7

RoCE

18.6

18.7

11.1

15.2

Inventory

2,035.9

2,350.5

1,861.3

2,943.2

RoIC

18.5

18.2

10.6

16.2

Total Fixed Assets

766.0

1,017.2

818.6

1,077.8

Valuation Ratios (x)

Loans and Advances

2,626.0

2,156.3

2,652.7

3,669.6

P/E

19.3

17.7

26.9

16.8

Other Current Assets

7.5

5.7

7.3

7.9

EV / EBITDA

12.0

10.6

13.9

10.0

188.0

142.3

252.6

511.4

2.6

2.4

2.4

2.0

Total Current Assets

5,623.4

5,672.0

5,592.5

8,209.9

Market Cap / Sales

2.6

2.4

2.4

2.0

Creditors

3,873.2

5,303.1

4,200.3

4,650.0

Price to Book Value

3.7

3.1

2.8

2.4

Debtors

Cash

EV / Net Sales

700.2

1,069.2

1,050.1

1,023.0

Solvency Ratios

Total Current Liabilities

4,573.3

6,372.3

5,250.4

5,673.0

Debt/EBITDA

0.9

0.9

1.2

0.7

Net Current Assets

1,050.1

-700.3

342.1

2,536.9

Debt / Equity

0.3

0.3

0.2

0.2

Current Ratio

1.2

0.9

1.1

1.4

Quick Ratio

1.2

0.9

1.0

1.4

Provisions

Others Assets Application of Funds

0.0

0.0

0.0

0.0

18,369.7

21,036.1

23,009.6

25,118.8




Page 4

Company Description UltraTech Cement manufactures cement and building products. The company produces a range of products that cater to all the needs from laying the foundation to delivering the final touches. Its products range includes ordinary Portland cement, Portland blast furnace slag cement, Portland Pozzolana cement, white cement, ready mix concrete and building products. Its white cement is manufactured under the brand name of Birla White, ready mix concretes under the name of UltraTech Concrete and building products under the name of UltraTech Building Products Division. Retail outlets of UltraTech operate under the name UltraTech Building Solutions. Exhibit 9: Recommendation History 2,500 2,000 1,500 1,000 500 0 Jan-13

Mar-13

Apr-13

Jun-13 Price

Jul-13

Sep-13

Oct-13

Dec-13

Jan-14

Target Price


Exhibit 10: Recent Releases Date 23-Apr-13 30-Jul-13 12-Sep-13 7-Oct-13 18-Oct-13 8-Jan-14 20-Jan-14

Event Q4FY13 Result update Q1FY14 Result update Event Update Q2FY14 Result preview Q2FY14 Result update Q3FY14 Result preview Q3FY14 Result update

CMP 1866 1872 1759 1905 1965 1701 1719

Target Price 2040 2040 2040 2040 2040 2040 2040

Rating HOLD HOLD BUY BUY HOLD HOLD BUY



Page 5

ICICIdirect.com coverage universe (Cement) CMP Sector / Company (|) TP(|) 1030 1,270 ACC (ACC)* 172 181 Ambuja Cement (GUJAMB)* 1720 2,040 UltraTech Cem (ULTCEM) 4419 5,080 Shree Cement (SHRCEM) 41 37 Heidelberg Cem (MYSCEM)* 55 50 India Cement (INDCEM) 188 205 JK Cement (JKCEME) 75 77 JK Lakshmi Cem (JKCORP) 37 32 Orient Cement (ORICEM) 108 110 Mangalam Cem (MANCEM) Source: Company, ICICIdirect.com Research

Rating HOLD HOLD BUY BUY HOLD HOLD HOLD HOLD SELL HOLD

M Cap (| Cr) 19,351 26,316 47,135 15,378 923 1,676 1,312 879 750 288


P/E (x) EV/EBITDA (x) FY13 FY14E FY15E FY13 FY14E FY15E 18.3 19.3 15.6 8.3 11.8 8.3 20.4 22.0 19.9 9.4 12.6 9.3 17.7 26.9 16.8 10.6 13.9 10.0 15.3 19.1 13.0 10.1 11.2 7.5 30.0 NA NA 25.3 20.0 16.5 10.2 0.0 13.9 5.4 7.1 5.8 5.6 12.7 7.1 4.0 7.9 5.7 5.0 9.3 6.0 3.9 6.5 4.9 4.6 7.7 5.8 2.5 3.6 2.8 3.7 5.6 4.6 3.3 7.2 5.1

EV/Tonne ($) FY13 FY14E FY15E 91 94 94 138 130 119 148 124 122 163 162 134 63 52 47 47 49 51 47 65 49 51 60 41 27 27 27 33 29 32

RoCE (%) FY13 FY14E FY15E 18.8 10.1 15.9 21.0 11.5 14.7 18.7 11.1 15.2 21.4 15.9 21.8 2.3 0.1 0.6 8.1 4.9 7.3 14.5 6.7 10.0 11.5 5.5 7.9 29.5 15.2 17.3 14.0 5.6 8.3

RoE (%) FY13 FY14E FY15E 14.4 12.0 14.2 14.8 11.9 11.9 17.4 10.2 14.2 26.1 19.1 22.3 3.6 -6.9 -6.6 4.0 -0.5 2.9 13.8 5.8 9.6 13.9 7.0 9.9 21.3 11.5 13.2 15.7 9.5 10.6

Page 6

RATING RATIONALE

ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;

Pankaj Pandey

Head – Research

[email protected]

ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai – 400 093 [email protected] ANALYST CERTIFICATION We /I, Rashesh Shah CA, Darpan Thakkar MBA research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.

Disclosures: ICICI Securities Limited (ICICI Securities) and its affiliates are a full-service, integrated investment banking, investment management and brokerage and financing group. We along with affiliates are leading underwriter of securities and participate in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and other business selection processes. ICICI Securities generally prohibits its analysts, persons reporting to analysts and their dependent family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. 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