Ultratech reported weaker-than-estimated earnings with volume growth in the domestic market moderating to 6% (from 15% y-o-y in Q4FY16) and modest improvement in cement realisations. Declining power and fuel costs was the mainstay of earnings growth, a trend that will likely reverse in H2FY17 based on spot prices of pet-coke. Rich valuations and dilutive impact of recent buyouts further prevent us from taking a constructive stance. Maintain SELL rating with target price of Rs 2,825. Volume growth moderates to 6% y-o-y, reduced fuel cost key proponent of higher profitability: Ultratech reported Q1FY17 net revenues of Rs61.8 bn (2% y-o-y,-4% q-o-q), Ebitda of Rs13.7 bn (26% y-o-y, 7% q-o-q) and net income of Rs7.8 bn (31% y-o-y, 14% q-o-q), lower than our estimates of Rs66.4 bn, Rs14.7 bn and Rs8.1 bn. The Ebitda miss was led by lower-than-expected volume growth of 6% y-o-y at 12.6 mt (15% y-o-y in Q4FY16 and 9% y-o-y factored by us). Power and fuel cost continued to trend down (-Rs187\/ton) on account of higher pet-coke usage and improved cement-to-clinker ratio, accounting almost entirely for the improvement in Ebitda\/ton (+R173\/ton y-o-y). Due to new reporting (per Ind-AS), the computed blended realisations appear to have declined by 3% y-o-y to Rs918\/ton even as Ebitda\/ton increased by 19% y-o-y to Rs1,092 The blended realisation appears low largely due to netting-off discount and sales incentives\u2014adjusted for these items, we believe realisations were up 1% y-o-y (+4% q-o-q) and broadly in line with our estimates of higher sequential realisations. We note that we expected 5% q-o-q increase in realisation led by higher prices in north and central regions in the quarter. Acquisition of Jaiprakash\u2019s assets may have long-term benefits but will be a drag in the interim: During the quarter, Ultratech\u2019s board approved acquisition of the 21.2 mtpa cement capacity from Jaiprakash at a consideration of Rs167 bn ($116\/ton). We highlight that at an Ebitda of Rs900\/ton and capacity utilisation of 71%, the acquisition will erode Rs17\/share (11% of FY2018 EPS). The management expects the acquisition to be concluded over the next nine months, though cautions that the acquisition will be earnings dilutive for at least eight quarters to begin with. Headwinds from rising power cost, modest volume trajectory Rich valuation multiples, moderating volume growth, rising production cost and dilutive impact of a large acquisition could put brakes on stock performance from here. A modest volume print in Q1FY17 raises the ask rate for the remainder of the year even on our moderated volume trajectory (+9% y-o-y), even as rising prices of pet-coke and imported coal will take away at least Rs120\/ton from the profitability. We cut our volumes estimates marginally by 1% to 51.6 mt for FY2017e, 55.4 mt for FY2018e and 59.3 mt for FY2019e after weaker-than-expected volumes in Q1FY17. We also adjust the discounts and sales incentives from realisations (due to Ind-AS impact), which results in 4% cut in realisations. Accordingly, costs are also reduced due to reduction of discounts and sales incentives under the cost head. Our Ebitda estimates are broadly unchanged though we cut our EPS estimate by 3-5% for FY2017-19e due to increase in interest cost estimate. We estimate EPS of Rs124 for FY2017e, Rs159.1 for FY2018e and Rs181.7 for FY2019e . Impact of Ind-AS\u2014net income benefit of Rs1 bn attributable to interest income: The shift to Ind-AS impacted net income favourably by Rs1 bn, primarily attributable to interest income on investments accrued as per fair valuation. The shift to Ind-AS had a limited impact on reported Ebitda (+R80 m) though revenues are likely understated on account of netting-off expenses pertaining to discounts and direct sales incentives. We note that the net sales during the quarter have been adjusted with discount and direct sales incentives (Rs10.6 bn in FY2016) that would have impacted net sales by 4.5%, though the same would have been adjusted in other expenses and hence does not impact Ebitda. Capitalisation of large stores and spares that would have resulted in lower other expenses resulted in a higher depreciation charge\u00a0 though. Higher employee cost on account of ESOP charges as well as mark-to-market of expenses pertaining to hedging of foreign currency instruments. Highlights from Q1FY17 results Volumes: Ultratech reported 5.6% y-o-y growth in sales of domestic cement at 12.57 mt, a sharp moderation from the 15% y-o-y growth reported in Q4FY16, and closer to estimated industry growth rate of 4%. UTCEM operated its 66\u00a0 mtpa of cement capacity at a utilisation of 77% during the quarter, with rural market penetration of 40%. We currently factor volume growth of 9% for full-year FY2017e increasing the ask rate for the residual nine months to 10% y-o-y. Management has guided for 7% y-o-y growth in industry volumes for FY2017. o Realisations: Management estimates realisations of grey cement at R4,683\/ton for Q1FY17, a 3% q-o-q improvement though down 2% y-o-y with blended sales increasing to 67% compared to 64% in the same period last year. We highlight that all-India cement prices have increased by R9\/bag in July 2016 (from Q1FY17) led by a second round of price increase in North and Central. Our full-year assumption of blended realisations of Rs5,180\/ton implies a\u00a0 Rs9\/bag increase in cement prices from July 2016 levels.