22 October, 2008

Stock: Ultratech Cement

Brokerage: Standard Chartered

 Standard Chartered has maintained 'performer' rating on the stock of Ultratech Cement, as the brokerage is positive on the long-term prospect of the company considering the cost reduction due to commissioning of captive power plants and fresh capacities. Stan Chat thereby have a target price at Rs 450 over 9-12months.

Ultratech Cement has been trading at a P/E of 5.0 times and 5.8 times its FY09E and FY10E EPS at Rs 74.4 per share and 65.1 per share respectively. However, on an EV/Tonne basis Ultratech Cement has been trading at an EV/Tonne of $68.9, which is at a discount to its replacement cost. Considering the current macro economic factors which whereby the demand is expected to slowdown to 7-8 per cent compared to 9-10 per cent in the past 2 years coupled with commissioning of major green field capacities by the industry player over the next 6 - 9 months we expect cement prices to remain subdued.

UltraTech Cement net profit was in line with expectations due to lower tax provisioning as it stood at Rs 164.19 million with an EPS of Rs 13.2 per share. However, operating margins were lower than expectations due to higher input costs and stood at 21.3 per cent.

Net Sales for the company recorded an increase of 19.6 per cent yoy to Rs 1400 crore in Sept'08 mainly driven by 6.8 per cent yoy increase in average realisations, which stood at Rs 3,337 per tonne. Sales volume during the period also recorded an increase of 13.1 per cent yoy though it was lower on a sequential basis due to monsoons.

Slowing demand in the domestic market and higher exports on a sequential basis post export ban along with increased clinker sales due to commissioning of Andhra Pradesh cement unit helped Ultratech Cement report a 13 per cent yoy increase in cement sales. On a QoQ basis cement and clinker sales were lower by 8.3 per cent. Average realisations in the domestic market were flat. However higher, clinker and export sales resulted in 3.2 per cent qoq reduction in blended average realisations.

Higher input cost mainly raw material and coal lead to a reduction in operating margins of 710 basis points on a yoy basis. Operating profit stood at Rs 296.73 crore in Q2FY09 compared to Rs 331.02 crore in Q2FY08, a decrease of 10.4 per cent yoy. The surge in power and fuel cost has been mainly due to surge in the prices of imported coal, which increased from $78 per tonne to $190 per tonne on a yoy basis. UTCL currently procures 40% of its coal requirement from the international market due to shortfall on coal supplies through linkages