We raise target price for UltraTech Cement (UTCL) to R985 from R965 based on FY12E (rolling forward from December 11). At our revised trading price, UTCL would trade at an EV/Ebitda of 9.5x; P/E of 20x. While the recent price hikes have been positive, (and further hikes could lead to trading opportunities) there are downside risks due to surplus capacity/cost pressures. While UTCL (at $124/t) does not appear overly expensive, all else being equal, we will likely become constructive when valuations dip below replacement costs ($120/t). We prefer Grasim for exposure to UTCL.
Cement producers have cut volumes and artificially boosted prices citing various factors (transport bottlenecks/shortage of rail capacity).
This volume cut has helped them raise prices over the last few months by 6-23% since January 11 to compensate for lower volumes/rising costs. However, the Indian cement industry remains oversupplied (with at least 10% surplus until FY13) and fragmented (around 30 companies; top 5 control 55% of capacity). Hence, we think cement prices have a downside risk.
Costs, such as of coal and freight, continue to be a key issue for the industry. About a third of UTCL?s coal is imported. The average coal cost in Q3FY11 was $110/t but should be around $130/t in FY12. Additionally, domestic coal linkage prices (a third of usage) were hiked by Coal India by around 30% in Feb-end.
UTCL has a capacity of 49 mtpa in India and controls ETA Star Cement (3 mtpa), based in UAE, Bahrain and Bangladesh). Capex over the next three years will be R10,000 crore on clinker/cement capacity and upgradation/logisitcs.
ULTC?s cement capacity should rise by 9.2 mtpa by early FY14, taking overall cement capacity to 61 mtpa.
Citi