UltraTech Cement’s profitability in Q2FY18 is expected to be muted given likely lower ramp-up of the recently-acquired 17.2 mt of Jaiprakash Associates’ (JPA’s) cement assets in a seasonally weak quarter coupled with higher integration/branding costs. Our channel checks suggest greater acceptability of UltraTech brand in newer markets of central India and the company is likely to realign its market-mix towards the high-growth eastern India markets to ramp up overall utilisation. UltraTech would gradually switch to lower-cost petcoke for JPA’s assets, and by Q3FY18-end variable cost/tonne is likely to be in line with company’s average. We concur with the management’s view that JPA deal would be cash-breakeven in four quarters and EPS-accretive in eight quarters.
We marginally tweak our estimates factoring lower volumes and revise our target price for the stock to Rs 4,775/share (earlier: Rs 4,875/share) based on 13x Mar’20E EV/E discounted to Sept’19E. Our FY18-20E EBITDA is 2-5% above consensus estimates. Valuation at 12x Sept’19E EV/E are attractive given our expectations of >25% EBITDA CAGR over FY17-FY20E. Maintain ‘Buy’. The acquired JPA assets likely operated at 35% utilisation during FY17 with EBITDA/tonne of `400/tonne. Management expects 60% utilisation in the first year of operations (vs 70% blended utilisation at the regions where assets are located) and 75% utilisation by the second year post acquisition. Our channel checks suggest the company has switched to UltraTech brand post 60-days of transition in markets of central India and the brand is witnessing greater acceptability. Given the relatively high utilisation of UltraTech’s existing capacities in high-growth eastern India, we believe UltraTech would realign its market mix towards these markets, especially Bihar and Jharkhand, to ramp up overall utilisation.
Improvement in profitability of JPA assets to be gradual led by better realisation on re-branding, improvement in operational efficiencies (e.g. shift to petcoke) and operating leverage (on higher volumes). Besides, assets in central and north regions are also eligible for government incentives. We do see imminent scope of mark to market earnings decline for most of the steel players, with FY18E EBITDA showing a scope of 9% to 14% decline for consensus EBITDA as steel/iron ore prices decline globally.