Multi Baggers

UltraTech Cement

Company profile:

Ultra Tech Cement Ltd. is a member of the Aditya Birla Group and a subsidiary of Grasim Industries Limited. It was incorporated on 24th August 2000 as L&T Cement Limited but the cement business of Larsen & Toubro demerged and vested in company in 2004. Grasim Industries acquired management control of the company in July 2004 and it was renamed as UltraTech Cement Limited from 14th October 2004.

It has an annual capacity of 18.2 million tonnes and has five integrated plants, six grinding units and three terminals — two in India and one in Sri Lanka. It manufactures and markets Ordinary Portland Cement, Portland Blast Furnace Slag Cement and Portland Pozzalana Cement. It also manufactures ready mix concrete (RMC).

Its subsidiaries are Dakshin Cement Limited and Ultra Tech Ceylinco (P) Limited. It is the country’s largest exporter of cement clinker. The export markets comprise countries around the Indian Ocean, Africa, Europe and the Middle East. The company exports over 2.5 million tonnes per annum, which is about 30 per cent of the country's total exports.

Highlights of Q1FY10 results:

Ultra Tech’s Q1FY10 results beat the streets expectations reporting a growth of 57.6% YoY and 35% QoQ to Rs 417.8 crore. Its EBIDTA margin also improved by 690 bps YoY to 36.7%. The surge in net profit and EBIDTA margins was mainly on account of higher margins led by a decline in power costs & other expenses and improvement in realization. Net sales grew 30.5% YoY and 5% QoQ to Rs 1952.8 crore in Q1FY10 from Rs 1496 crore in Q1FY09. Sales volume (cement and clinker) grew 24.4% YoY to 5.3 million tonnes. The total cost has declined 5.4% YoY to Rs 2328 per tonne.

Industry status:

The Cement demand has a very strong correlation with GDP growth and as estimates of GDP rise the growth potential should also rise. Another factor is the imposition of countervailing duty on imports, which has reduced imports to a trickle. On the other hand there is possibility of oversupply kicking in as new capacities- both green and brown field- come up. It must however be admitted that the new capacity creation has been no where near what was thought a year ago and many projects are running behind schedule for various reasons.

Investment positives:

The power cost of the company will be reduced owing to the sharp decline in freight rates and the price of international coal, which constitutes 47% of the company’s total fuel requirement.

The company has capex plans of Rs.2,000 crore, which will be spent over the next two years for expansion across Maharashtra and Gujarat. The capex will be mainly funded through internal accruals.

With both cement and power expansion on stream, the stock is likely to offer benefit of volume growth and cost savings.

Key concerns:

Nearly 80% of the volume is derived from the southern and western zones and exports. Since these segments face the risk of oversupply, a high exposure to them could result in sharp drop in cement prices and neutralize the company’s cost advantage.

The realization of the company is also expected to come under pressure due to the adverse demand-supply scenario.

Risk of sharper price correction or slower demand growth also exists.

There could be a sharp upward revision of international coal prices, which would affect the costs of the company.

Valuation:

At the CMP of Rs 798.35 per share, the stock is trading at a P/E of around 8.1x and 9.1x of its FY10E and FY11E expected earnings, respectively. On the basis of EV/EBDITA, the stock trades at 4.6x and 4.4x for FY10E and FY11E respectively. Price to Book Value of the stock is expected to be at 2 and 1.5 respectively for FY10E and FY11E. It is trading at an EV/tonne of $ 90 and $ 80 its FY10E and FY11E capacities, respectively. This is an excellent mid cap Cement pick with a price target of Rs 990 per share

Disclosure:

The share finds a place in the proprietary portfolios of the author as also some of the portfolios of P.N.Vijay Financial Services P Ltd of which he is the Managing Director.