Ultratech Cement Rating – ‘Buy’: A weak Q3 owing to flat realisation

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Published: February 4, 2019 3:02:45 AM

TP reduced to Rs 4,400 from Rs 5,150; company well placed for an upcycle; ‘Buy’ retained

Driven by affordable housing and infrastructure, the cement demand outlook remains good.

In Q3, UT’s volume growth at 14% y-o-y was robust. But, in line with our expectation, cement realisation at Rs 245/bag was flat q-o-q. Due to higher costs, Ebitda (up 10% y-o-y) was 6% below our estimate. And, driven by lower other income, PAT (up 7%), was 15% below our estimate.

Driven by affordable housing and infrastructure, the cement demand outlook remains good. While cement pricing has disappointed so far, we think price increases should begin soon. Also, with declining commodity prices, operating costs should reduce, boosting realised margins. With large capacity increases, we continue to believe that UT is well placed for an upcycle.

Maintain Buy with reduced TP of Rs4,400: Driven by weak 9M earnings, price increases that were lower than we expected, higher costs, and higher fixed charges for the Binani and Century capacity acquisitions, we reduce our earnings forecast by a sharp 42% for FY19F, and by 23% for FY20F. We now expect only a moderate 2% EPS increase in FY19F; however, with higher volumes and improved profitability, we expect a sharp revival in earnings, with a CAGR of 37% over FY19-21F. We now value UT at 14x (from 18x) average FY20-21F (average FY19-20F previously) EV/Ebitda to account for recent difficulties in raising prices, and weaker profitability of recently acquired capacities. And we cut our TP to Rs4,400. Our revised TP implies 16% upside and we reiterate our Buy rating. UT currently trades at 12x FY21F EV/Ebitda and 25x FY21F P/E.


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