ICICIDirect - Research Report - UltraTech Cement (Buy: Rs 715, Target: Rs 890)

UltraTech Cement (ULTCEM)

Price: Rs 715 Target: Rs 890
OUTPERFORMER

UltraTech Cement, a subsidiary of Grasim Industries, is one of the leading cement manufacturers in the western and southern regions. The company has undertaken a Rs 2,700 crore capex plan over the next three years (FY07-09) to increase its production capacity. It is also replacing its high-cost naptha-based power plant in Gujarat with an efficient lignite-based plant. The stock is currently available at a attractive enterprise value per tonne of $140 per tonne. We initiate coverage on the company with an OUTPERFORMER rating.

Capex to drive growth: The company has undertaken a Rs 2,700 crore expansion plan over the next three years (FY07-09). It will scale-up its production capacity by 4 million tpa from the current 17 million tpa by Mar FY08. We expect net sales to grow at a CAGR of 25% to Rs 6, 587.15 crore in FY09E from Rs 3,339.33 crore in FY06.

Captive power plant to cut costs: UltraTech's earnings were impacted due to its high power costs. It is now setting up captive power plants at its units in Gujarat and Chhattisgarh. In Gujarat, it will replace its naptha-based power plant by a more efficient lignite-based plant. We expect savings of Rs 170 crore per annum FY09 onwards which would boost the company's EBIDTA margins to 33.8%, in line with other major cement players.

Low cement clinker ratio, more scope for blending: Currently, the company's cement clinker conversion ratio is low at 1.14, below the industry average of 1.45. We expect company will reach to 60-65% of blended cement as against 40% currently of blended cement. This should help it to reduce costs and improve profitability.

Strong presence in fast-growing markets: UltraTech has a strong presence in the southern and western regions. These markets are expected to grow at a faster pace than other regions. With the demand-supply mismatch expected to continue till FY09, the company's additional capacity of 4 million tpa will get easily absorbed.

Valuations: At the current price of Rs 715, the stock trades at an EV/EBIDTA of 6.40x FY08E and 5.03 x FY09E respectively. We have taken the average of various valuations like EV/EBITDA, P/E and P/BV to arrive at a target price of Rs 890. At the target price, the stock would be valued at $140 EV/tonne for FY09E at an increased capacity of 21 million tonnes.

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