Buy UltraTech Cement, cost benefits percolating

Buy UltraTech Cement with a target price of Rs 3,534, implied FY17e EV/ebitda of 13.5x.

Buy UltraTech Cement with a target price of R3,534, implied FY17e EV/ebitda of 13.5x. It is the preferred large cap pick in the cement space and offers the best play on demand recovery, along with superior profitability and consistent improvement cost management. At FY17e EV/ebitda of 10.4x and EV/ton of $178 per tonne, the valuations factor in near-term weakness in demand.

We are raising FY16/17 EPS by 5.9%/4.6% after incorporating marginal tweak in realisations, volume and RMC revenue. Management didn’t share specific industry volume guidance for FY16 and sounded cautious with potential weakness in H1FY16 due to weak rural demand, and likely take-off in H2FY16.

UltraTech’s grey cement volume de-grew 3% y-o-y (up 8% q-o-q) to 11.81 million tonnes (in line). Realisations beat estimates with 5.6% q-o-q uptick (versus estimates of +3% q-o-q) to R4,386 (+10.4% y-o-y). Cement revenue stood at R5,180 crore, +7% y-o-y (versus estimate of R5,060 crore). RMC volume recorded 10% y-o-y de-growth (versus estimate of -6%), while white cement volume grew by 7% y-o-y (in line). Overall revenue grew 5.2% y-o-y (+12% q-o-q) to R6,140 crore (versus estimate of R6,080 crore).

Ebitda grew 8% y-o-y (+46% q-o-q) to R1,230 crore (versus estimtated R1,220 crore), translating into ebitda margins of 20.1% (4.7 pp q-o-q; +0.5 pp y-o-y versus estimated 20%).

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