Ultratech Cement

The stock of UltraTech Cement is a good investment option for investors with a one/two-year perspective. A focus on the promising Western region, a first-mover advantage in capacity additions and substantial captive power capacities make UltraTech a preferred exposure within the cement sector.

At its current market price of Rs 775, the stock trades at nine times its estimated 2009-10 earnings, at a discount to peers such as ACC and Ambuja Cement (12-13 times their estimated FY10 earnings).

UltraTech’s sales and profits have grown at a compounded annual rate of 25 per cent and 44 per cent respectively in the last four years. The company has benefited from the Western region’s strong demand for cement, reporting an 18 per cent surge in domestic volumes and 91 per cent jump in export volumes in the June quarter. UltraTech also has a smaller presence in Southern and Central markets.

The Rs 3.5-lakh-crore of industrial investments slated for Gujarat and the revival of cement exports from the region point to good demand prospects in the region. Though surplus capacity is a key concern for cement companies over the medium term, UltraTech is less vulnerable to this risk as only 9 per cent of the new capacities for this year are coming up in the West. Cement prices in the region have climbed from Rs 245/bag in January to Rs 260/bag in June.

One of UltraTech’s key advantages is that much of its capacity expansion has already been commissioned. With the recent 1.2-million-tonne expansion in the South, its capacity stands at 23.1 million tonne. UltraTech’s thermal power capacity meets almost 80 per cent of its power requirements. While these factors insulate the company from power shortages and a spike in power costs, further proposals to set up waste heat recovery systems which can save costs, are also on the anvil.

The company managed to keep a tight rein on its costs in the June quarter, with power-fuel costs registering a 1 per cent decline over last year; operating margins expanded 7 percentage points to 39 per cent. The company’s profits after tax during the same period rose 58 per cent. With realisations expected to remain firm even as regional demand drivers are strong, the earnings outlook remains positive for the next 12 months.

via BL