>ULTRATECH CEMENT: Expansion at Chhattisgarh and Karnataka for 9.2mt cement capacity are on track

Recommendation: Hold

Price target: Rs1,275
Current market price: Rs1,209

Price target revised to Rs1,275

Result highlights

• Operating profit in line with estimate; PAT ahead of estimate: In Q3FY2012 UltraTech Cement (UltraTech) posted an operating profit of Rs964.9 crore (up 36.3%), which is in line with our estimate. However, on account of a surge in the other income and a decline in the interest cost (due to the subsidies received in the earlier years under the State Investment Promotion Scheme) the net profit of the company grew by 93.4% year on year (YoY) to Rs616.9 crore, which is ahead of our estimate. 
• Revenue growth largely driven by realisation growth: The revenue growth of 23.1% was supported by an increase of 16.2% in the average blended realisation YoY to Rs4,509 per tonne. On the volume front, the overall sales volume (including cement, clinker, export and white cement volumes) grew by 5.9% on a year-on-year (Y-o-Y) basis to 10.14 million tonne. On a sequential basis, the volume has witnessed sign of post monsoon recovery and grew by 7%. The blended realisation was higher by 9.3% on a quarter-on-quarter (Q-o-Q) basis. Going ahead in Q4FY2012 we believe cement prices will remain strong with a likely increase in the cement offtake. 
• Expansion in the OPM due to higher realisation: On the margin front, the operating profit margin (OPM) expanded by 205 basis points YoY to 21.1% on account of a 21.2% increase in the realisation. However, on the cost front the key cost elements like the raw material cost, the power & fuel cost and the freight charges continued their upward trend. This increased the overall cost of production by 18.1% to Rs3,618 per tonne. The operating profit increased by 36.3% YoY to Rs964.9 crore and the EBITDA per tonne increased by 28.7% YoY to Rs952. 
• Surge in other income and decline in interest cost: The other income increased by 156.4% to Rs155.4 crore (which included Rs66.6 crore for the subsidies related to the earlier years availed of under the State Investment Promotion Scheme). Further, the net interest cost declined by 63.9% YoY to Rs29.5 crore on account of the net subsidies of Rs38.4 crore received. Hence, the reported net profit of the company grew by 93.4% YoY to Rs616.9 crore. 
• Expansion at Chhattisgarh and Karnataka for 9.2mt cement capacity are on track: The company is setting up additional cement clinkerisation plants at Chhattisgarh and Karnataka. Work on both the plants is on track. The company has already placed the orders for the major equipment. The expansion will increase the total cement capacity by 9.2 million tonne and the additional capacities are expected to come on stream by Q1FY2014. After the commissioning of the aforesaid capacities the cement capacity of the company will enhance to 59 million tonne per annum (mtpa).
• Oversupply to continue for three years, cost inflation to pressurise margin: As per the management, the oversupply scenario in the domestic cement industry is likely to continue in the coming three years which will have an adverse impact on the cement prices. Further, the sharp increase in the domestic and imported coal prices coupled with a likely increase in the freight cost will keep the margins under pressure. 
• Upgrading earnings estimates for FY2012 and FY2013: We are upgrading our earnings estimates for FY2012 and FY2013 mainly to factor in the higher than expected blended realisation in Q3FY2012. We are also factoring in some pressure on the power & fuel cost with the change in the pricing mechanism for domestic coal. The revised earnings per share (EPS) estimates work out to Rs72.8 for FY2012 and Rs82.3 for FY2013. 
• Maintain Hold with a revised price target of Rs1,275: We like UltraTech due to its diversified pan-India presence and strong balance sheet. Further, the company's footprint in the growing markets like Bangladesh, Dubai, Sudan and Bahrain augurs well for its business. However, on account of the pressure expected on the cement prices in the coming one year and the cost inflation in terms of the rising prices of coal (imported as well as domestic) we maintain our Hold recommendation on the stock with a revised price target of Rs1,275 (valued at enterprise value [EV]/tonne of $120). At the current market price the stock trades at a price/earnings (PE) of 14.7x, discounting the FY2013 estimates. On an EV/EBITDA basis, the stock trades at 7x FY2013E.

RISH TRADER