Ultra Tech Cement: Buy

The Ultra Tech Cement stock seems a reasonable investment option for investors with a medium-term investment horizon. The company has ambitious plans for capacity addition that could support volume growth, cost-saving measures that may improve margins and solid financials.

The company’s 4.9-million-tonne capacity in Andhra Pradesh will be fully operational by this March. Ultra Tech has also planned an additional Rs 3,300-crore capex on de-bottlenecking exercises and setting up captive power plants that would further improve operating margins. At the current market price of Rs 889, the stock trades at 13 times its FY-08 earnings which, compared to peers — ACC and Ambuja Cements — is at a discount. Investors with a one-two year perspective can consider exposure in the stock.

The company has reported a 19.5 per cent growth in net sales in the nine months between April and December 2007, with a 36 per cent increase in operating profits and a 3.80 percentage point expansion in margin. The southern and western regions, the main target markets for the company may witness stronger demand growth for cement in the year ahead on account of an expected increase in demand from the infrastructure sector.
Business Overview

Earlier the cement division of L&T, Ultra Tech Cement demerged from it in 2004 and was acquired by the Aditya Birla group with a 30 per cent stake taken by Grasim Industries. The company is a major player in the West with plants located in West Bengal, Maharashtra and Gujarat and one plant each in Tamil Nadu and Andhra Pradesh.

Ultra Tech has a capacity of 17 million tonnes to which it is adding 4.9-million tonne by commissioning a unit in March this year. With this, the company’s total capacity would go up to 21.9 million tonnes by the end of this quarter. The said 4.9-million tonne would be an addition to its Tadipatri unit in Andhra Pradesh, strengthening the company’s presence in the South.

The southern region has seen relatively firm trends in cement prices due to strong demand growth. The market appears capable of absorbing the incremental supply generated by the company; demand in this region recorded a 12.6 per cent increase between April and December 2007. The outlook for FY-09 also looks quite promising with several government-funded infrastructure projects taking off in Tamil Nadu and Andhra Pradesh.

The company has also announced a Rs 3,300-crore capex plan for de-bottlenecking exercises and to build captive power plants over the next three years. A new captive power plant at Gujarat is set to be operational by end-March. Of the total capex of Rs 3,300 crore, Rs 1,700 crore may be funded by debt and Rs 1,600 crore through internal accruals. Strong volume growth may, thus, make up at least partially for any moderation in cement prices expected on account of fresh capacities going onstream over the next year.
Financials

Ultra Tech Cement has reported an impressive performance in the recent December quarter, helped by higher realisation and improved operational efficiency. While net sales inched up by 10 per cent, operating margins too expanded strongly by 3.86 percentage points.

Volumes for the quarter ending December 2007 registered a 6 per cent growth from 3.21 million tonnes in Q3FY-07 to 3.40 million tonnes. Net sales for the quarter grew 10 per cent, from Rs 1,260 crore to Rs 1,382 crore. The company’s plants are now running at 102 per cent utilisation levels.

Despite a 11.9 per cent increase in fuel cost due to rising coal prices, the company was able to record an expansion in operating margin primarily because of improved production efficiency.

The operating profit mounted to Rs 488.62 crore, up 23 per cent from Rs 396.9 crore in the corresponding previous quarter.
Risks

The huge capacity additions that would be coming on stream towards the end of FY-09 could bring down the utilisation rates across players. Lower-than-expected demand or further policy measures to curtail cement prices could pose risk to realisations and, thus, earnings