Maintain ‘buy’ on UltraTech Cement with a price target of R3,290 a share. We value the company at 12.5x EV/Ebitda, which is at ~25% and ~10% premium to our target multiple of ACC and Ambuja Cement, respectively. Based on 12.5x FY17e EV/Ebitda, we arrive at our price target.
As per reports, Ultratech could acquire Jaypee’s 74% stake in Bhilai Jaypee Cement, which has clinker capacity of ~1.1 million tonne at Satna (MP) and grinding capacity of ~2.2 million tonne at Bhilai, Chhattisgarh (adjoining a SAIL Steel plant). On the positive side, this acquisition would further improve Ultratech’s exposure to non-South regions, which are better placed from demand-supply perspective.
On the other hand, the reported valuations of EV of R2,100-2,200 crore (~$150–157 per tonne) appear to be on higher side considering the earlier acquisition of Jaiprakash Assocaites’ MP Plants at a lower valuation (EV of $125 per tonne). The valuation looks more expensive if adjusted for lower installed clinker capacity plus there is no captive power plant at its clinker unit.
Jaypee Bhilai Cement’s current profitability is quite low (Ebitda margins in FY14 were ~7% vs UltraTech’s ~20% margins in the same period). Nevertheless, we think there is ample scope for improving profitability through higher realisations as well as savings on power and logistics costs.
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