We have been highlighting in the past that UltraTech Cement’s (UTCEM) aggressive capacity expansions will drive strong volume growth as and when cement demand revives in India. However, we remain concerned about the company’s high cost of expansions, which will restrict RoCE growth in the future. We currently expect the company’s RoCE to improve only marginally to and remain lower than the last five-year averages and materially lower than the peak RoCE of 18-25% seen during FY07-09. The stock is trading at 13.5x one-year forward/11.2x FY16 ebitda. Our target price of R2,202 implies 8.8x exit FY17 ebitda. Maintain ‘sell’ on UTCEM.
Continuing with its 100 million tonne capacity pursuit, UTCEM announced R5,400 crore ($857 million) acquisition of Jaiprakash Associates’ two cement plants in eastern MP. Post this acquisition, UTCEM will become a leading player in central India (UP, MP) with a capacity share of 25% (versus 13% pre-acquisition); more importantly it gets most adjacent capacities to service Bihar and eastern UP.
Although the grinding capacity can be scaled up by 1.8-2.5 million tonnes, we find the deal expensive at $180 per tonne. Assuming the company adds another 2 million tonne grinding units at $60 per tonne, the overall acquisition cost works out to $145 per tonne, still much higher than its recent greenfield expansion costs of $120 per tonne and the recently acquired JAL’s Gujarat unit at $124 per tonne.