UltraTech Cement shares: Weak industry environment affecting cement prices and volumes
UltraTech Cement’s reported earnings were broadly in line with estimates, but Ebitda (ex-other operating income) had a slight miss. UltraTech?s 4% y-o-y volume decline highlights the weak industry environment. We remain sharply below consensus estimates (16/24% for FY14/15e) and see material downside to Street estimates, essentially on a weak industry environment affecting cement prices and volumes.
We roll forward our price target (PT) to Mar-14 from Dec-13 but reduce our target multiple to 8x FY15e EV/Ebitda (enterprise value/earnings before interest, taxes, depreciation and amortisation) as demand is likely to remain weak in the near term. We remain underweight (UW) on UltraTech and prefer parent Grasim at current valuations.
Higher-than-expected ASP decline offset by lower costs: UltraTech reported Q4 Ebitda of R12.8 billion (+22% q-o-q, -3% y-o-y) vs. our estimates/consensus of R12.4 billion. Sales were lower than expected, driven by lower ASPs (average selling price-1% q-o-q). However, sharply higher other operating income and lower costs led to in-line operating results. The company continued to see lower power cost/mt (-13% q-o-q), which in our view was driven by higher pet coke usage. Freight cost/mt increased around 1% q-o-q and should see further increase in Q1FY14 with higher railway freight and diesel costs. Ebitda/t stood at R1,152/t, up 9% q-o-q. PAT was R7.3 billion. UltraTech announced dividend of R9/share (around 9% payout) for FY13.
Capex focus continues, with another expansion announced: UltraTech completed its Chhattisgarh expansion in the quarter and plans to commission Karnataka expansion in Q1FY14. Cement capacity increased to around 51mt from 48.8mt. The board also approved the 2.9mt brown field expansion in Rajasthan (likely to be commissioned by Mar-15) with a capex of R20 billion (implying capex/t at R6,900/t).
Industry outlook remains challenging: We expect cement prices to remain under pressure until the end of the rainy season. An election-led demand increase should start to come through in Q3FY14. Costs are likely to continue to inch up given steady diesel price increases.
Price target: Our Mar-14 price target of R1,600 based on 8x FY15e EV/Ebitda, at the high end of the stock?s trading range given the continued strong underlying profitability.
