We maintain our ‘sell’ rating on UltraTech Cement with a target price of Rs 2,000, however, we price in an optimistic revival with little headroom on valuations. The stock trades at 13x EV/ebitda on FY16e earnings, despite factoring a healthy 8-10% CAGR improvement in volumes and 14% CAGR improvement in ebitda per tonne. We have revised our earning estimates for FY15 by 11% and FY16 by 14% to factor dilution due to acquisition of Jaiprakash’s cement assets in Gujarat. We note the benefits of higher volumes have been lost to lower realisations during the quarter and higher interest expense owing to debt attributable to the Gujarat capacity.
UltraTech reported net sales of R5,600 crore (14% y-o-y, -3% q-o-q), operating profit of R1,000 crore (-4% y-o-y, -12% q-o-q) and net income of R620 crore (-7% y-o-y, -16% q-o-q) against our estimates of R5,500 crore, R1,100 crore and R700 crore, respectively. Volume growth of 16% y-o-y was above our estimate of 10% y-o-y as sales from recently acquired Gujarat units were included for part of June. However, the benefits of higher volumes were lost to absence of improvement in realisations — R4,792 a tonne (-5% y-o-y, flat q-o-q) in Q1FY15.
The price increase in South India notwithstanding, cement realisations failed to improve for UltraTech in Q1 due to improvement in prices in other regions and resumption of Binani Cement operations. The higher operating costs were due to higher employee costs (10% y-o-y, 17% q-o-q), higher power costs (22% y-o-y, 2% y-o-y) and higher freight costs (21% y-o-y, -3% q-o-q).
Kotak Institutional Equities