A not so promising start to the year with a net income decline of 6% year-on-year and weak management commentary on pricing and volumes for the ensuing quarter as well, prompt earnings downgrades of 18% for FY16e, with the street continuing to pin its hopes on the elusive “second half recovery.” Declining power and fuel costs and 4% y-o-y growth in volumes aided by acquisitions were the limited positives from the quarter’s results. Maintain Sell rating, with a revised target price of Rs 2,500 (Rs 2,600 previously).
Realisations remain weak: Ultratech reported net sales of Rs 60.3 bn (7% y-o-y, -2% q-o-q), Ebitda of Rs 10.9 bn (8% y-o-y, -11% q-o-q) and net income of Rs 5.9 bn (-6% y-o-y, -4% q-o-q). Its cement sales increased by 4% y-o-y to 12.1mt (+3% q-o-q). However, we note that previous year’s numbers are not comparable on account of acquired assets of Jaypee Cement from June 2014. Blended realisations of Rs 4,974/tonne (+3% y-o-y, -4% q-o-q) was a tad lower than our expectation. Lower costs at Rs 4,074/ton (+3% y-o-y, -2% q-o-q) largely aided by lower power and fuel costs (Rs 904/tonne, -12% y-o-y, -10% q-o-q) aided profitability. Ebitda/tonne increased 4% y-o-y to Rs 900/tonne.
Acquisitions may prove a drain near-term: While we remain positive on the acquisition strategy of Ultratech, its current profitability of Rs 900/tonne ($15/tonne) will make the acquisitions of Jaiprakash Associates ($125/t) and operating at low utilisations (blended utilisations at 80% for Q1) earnings-dilutive near-term. For instance, the benefit of 8% y-o-y growth in Ebitda in Q1 was lost to higher interest and depreciation cost, yielding 8% y-o-y decline in profit before tax, and 6% y-o-y decline in profit after tax.
Valuations expensive; revise target price to Rs 2,500: At 13.5X EV/Ebitda 24x P/E (price-to-earnings multiple) and $217/ton FY17e earnings and capacity respectively, the stock is demanding, despite a 30% CAGR growth in Ebitda factored by us compared to 8.4% y-o-y growth in Q1FY16. Our earnings estimates bake a healthy 7% CAGR in volumes over the next two years as well as Rs 420/tonne improvement in Ebitda/tonne to Rs 1,293/ton in FY2017e (Rs 900/tonne in Q1FY16). We incorporate weak Q1FY16 financials in our model and cut our FY16e EPS by 18% and FY17e EPS by 7%. We maintain our Sell rating with a revised target price of Rs 2,500/share (Rs 2,600 previously).