'Reduce' on UltraTech Cement shares, says Kotak Institutional Equities
Posted online: Thursday, Sep 12, 2013 at 0000 hrs
We maintain our cautious stance on UltraTech Cement Ltd
shares and revise our rating to ‘reduce’ from ‘sell’. On an earnings basis, the company trades at 8X on FY15e operating profit, only 20% off the upper end of the historical trading band of 10X. Rich trading multiples and impending regulatory order, continued price volatility, the potential burden of an acquisition and aggressive capex plans put UltraTech Cement's cash flows at incremental risk and we maintain our cautious stance as we revise earnings estimates by 14% and 7% for FY14e and FY15e, respectively, to factor in continued price weakness and, accordingly, revise our target price to Rs 1,650.
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Assuming that the current rate of profitability holds and volumes post no revival, our earnings for FY15e could be revised downwards, by 30%, implying a downward revision in fair value estimate to Rs 1,380 from Rs 1,650 currently.
The recent correction in UltraTech's stock price (16% over the past three months) prompts a review of our stance, given compression of valuations to EV/ton of $108 per tonne on capacity, though historical trends suggest the stock can continue to trade below replacement cost until earnings momentum (limited visibility so far) drives a re-rating. In our view, a potential acquisition of Jaiprakash Associates Ltd' cement assets could increase the earnings and asset valuation disparity.