UltraTech Cement
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs490
Current market price: Rs384
Ultra-profitable
Key points
- Cement prices in the country have risen in the past one year and are expected to remain buoyant owing to a rising demand, depleting surplus supply and slow-down in capacity addition.
- We expect UltraTech Cement Ltd (UCL), which has the highest leverage to cement prices, to benefit the most from the continued uptrend in cement prices.
- UCL's freight costs are high mainly due to the long lead distance for its cement markets. We believe that the synergies with Grasim would help it in reducing its freight costs and in improving its margins.
- UCL has lined up a capital expenditure (capex) plan of Rs1,003 crore over the next two years; this includes a Rs540-crore, 92-megawatt (MW) thermal power plant for captive use. This shall reduce its dependence on grid power and lower its power cost.
- The construction boom in the Middle-East has increased the export prices of cement and clinker by 59% year on year to US$43 FOB and US$35 FOB respectively. Since around one-third of UCL's capacity is located near the Gujarat port we expect the company to be the prime beneficiary of the buoyancy in the export market.
- Driven by the firm cement prices, increased utilisation levels and the company's transformation into an efficient cement producer UCL's net profit is expected to grow at a healthy compounded annual growth rate (CAGR) of 76% over FY2005-07.