>ULTRATECH CEMENT (CITI)

Sell: 1QFY10 – Very Strong Margins; But Unlikely to Sustain

■ Strong EBITDA/t in 1Q — This was a bumper quarter for ULTC as PAT rose 58% to Rs4.2bn (13% above estimates), and EBITDA margins were 37% (vs. 30% last year) on higher realizations, strong volumes and lower costs. EBITDA/t grew 29% yoy to Rs1,350/t, substantially higher than in the past.

■ Surge in volumes — Sales volumes (including clinker) rose 24% to 5.3m tonnes; domestic cement sales increased 17% yoy to 4.5m tonnes due to the commissioning of the 4.9mtpa Andhra Pradesh plant taking ULTC's capacity to 23mtpa. Buoyant demand also supported the growth. We forecast volume growth (including clinker) of 11% in FY10 to 20.2m tonnes.

■ Good quarter for pricing — Strong demand trends and temporary disruptions in cement supply kept prices firm in 1Q. Average domestic realizations for ULTC rose 9% yoy and 5% qoq to Rs3,700/t. Realizations are expected to decline in coming quarters due to the substantial increase in cement capacity. Prices have already begun to decline in the South, where ULTC's new capacity has come up and which accounted for ~25% of its FY09 sales.

■ Lower power & fuel costs — Per tonne power and fuel costs fell 20% yoy in 1Q due to (1) lower coal costs as ULTC imports ~40% of usage; (2) benefit of captive power plants, which should meet ~80% of requirements. Per tonne raw material costs rose 9% yoy (23% qoq) due to clinker purchases.

■ Maintain Sell — While cost pressures will be less of an issue for ULTC in FY10E-11E, price declines are likely to cause margins to fall.

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