Thursday, April 26, 2012

>ULTRATECH CEMENT: Q4FY12 Result update

Result above estimates, earnings growth to moderate

AUltra Tech’s Q4FY12 result was above both our and Consensus estimates primarily due to lower-than-expected cost pressure, higher other income and lower tax rate during the quarter. The company reported EBITDA of Rs12.6bn vs. est. Rs11.8bn and EBITDA margin was at 23.7%, 1.3pp above our estimate of 22.4%. Higher-than-expected operating margin was driven by 6.3% QoQ decline in power & fuel cost to Rs1,031/tonne. The management said that
higher usage of pet coke and improved efficiency were the reasons for sequential decline in power & fuel cost. Higher other income of Rs2bn (up115% YoY) and lower tax rate (26% against 32.8% in Q3FY12) led to adjusted profit of Rs8.6bn against our estimate of Rs7.1bn (Bloomberg consensus’ estimates of Rs6.7bn). We believe that higher domestic realization (up ~16% YoY, despite lower industry utilization rate) helped the company register robust earnings growth of 42% in FY12 (which in our view led toA outperformance of the stock in FY12 despite higher valuations, sluggish demand and concerns on sustainability of higher prices). However, going forward, with our expectation of earnings decline in FY13E due to cost pressure, decline in other income and higher interest expense, we expect the stock to come under pressure. We maintain Sell on UTCEM with target price of Rs1,179, downside of 24% from its CMP.

 Higher realization and sales volume help to post better results: Higher blended realization (up 10.2% YoY) and sales volume (up 7.9% YoY) resulted in 18.9% YoY growth in revenues to Rs53.3bn, 1% above our estimates of Rs52.9bn. Higher realizations led to 22.2% YoY increase in EBITDA to Rs12.6bn (est.: Rs11.8bn).

 Lower power & fuel cost expands EBITDA margin: Power & fuel cost declined 6.3% QoQ to Rs1,031/tonne primarily due to higher usage of pet coke in the quarter and improved efficiency. EBITDA margin during the quarter was at 23.7% (vs. est. 22.4%) and EBITDA/tonne of Rs 1,095 against our estimate of Rs1,021/tonne.

 Higher other income and lower tax rate boosts adjusted profit: Higher other income of Rs2bn (up 115% YoY) and lower tax rate (26% against 32.8% in Q3FY12) resulted in 40.3% YoY growth in adjusted profit to Rs8.6bn (our estimate: Rs7.1bn). Higher other income was due to maturity of FMPs in FY12 and subsidies related to state investment promotion scheme.

 Earnings to decline in FY13: Benefitting from higher domestic realizations (up ~16% YoY despite lower industry utilization rate), adjusted EPS (on a liketo-like basis) of the company increased 42% YoY to Rs83.6 in FY12. We believe that outperformance of the stock over the past 1 year was driven by stellar earnings growth despite concerns on the sustainability of pricing power and sluggish volume growth. Going forward, we expect EPS to decline 2.3% YoY to Rs81.7 in FY13E.

 Increasing costs remain a challenge; maintain Sell on expensive valuations: Operating costs (up 12% YoY in FY12) continue to remain higher and margins could be under pressure going forward. The stock is trading at 15.5x FY14E EPS, 8.6x EV/EBITDA and US$163.7 EV/tonne. We maintain Sell on the stock with target price of Rs1,179, a downside of 24% from its CMP.