Choice Broking Research-UltraTech Cement.

19
UltraTech Cement Rating Matrix CMP Rs. 3121 Rating Buy Potential Price Range Rs.3400-Rs. 3550 Target Period 12 Months Upside Potential Upto 14% 52 week H/L Rs 3,196/1,820 Face value Rs.10 Sector Cement ULTRATECH CEMENT LIMITED is a leading cement manufacturing company in India with total 63 Million Tonnes/annum installed capacity. UltraTech Cement, being the most aggressive among its peers in adding capacity, has highly efficient operations and sizeable capacity to remain the major beneficiary of acceleration in demand growth in Indian economy. Cement Consumption Witnessing Improvement Cement industry, being highly sensitive to country’s GDP growth, has been witnessing improvement in demand during current fiscal led by recovering economic scenario. Revival in construction activity, increasing demand from housing sector, low base of last year as well as delayed onset of monsoons this year has augmented the domestic consumption. Indian cement industry has shown significant recovery in demand and profitability in FY15. The growth in cement production picked up to 7.9% during the first nine months of FY15 as against 3.7% in the corresponding period last fiscal. We expect a strong recovery in Indian cement demand led by thrust of government given for infrastructure development, low-cost affordable housing projects and setting up of smart cities. UltraTech to remain Prime Beneficiary of Acceleration in Demand Growth UltraTech is a leading cement manufacturing company in the country having 63 MT/annum installed capacity and accounts for around 17% of domestic market revenue. UltraTech, being the largest pan India player, will be the major beneficiary of acceleration in demand growth in the Indian markets. UltraTech is also the lowest-cost producer amongst Indian cement players, moreover proactive initiatives taken by the management to save energy and logistics cost will further strengthen the company position in market. Shareholding Pattern as on Dec 2014 Particulars Dec'14 Sep'14 Jun'14 Mar'14 Promoters 61.7% 61.7% 61.7% 61.7% FIIs 19.5% 19.9% 20.4% 21.0% DIIs 5.9% 5.7% 5.3% 4.9% Non Institutions 10.6% 11.0% 10.8% 10.6% Others 2.3% 1.8% 1.8% 1.8% www.choiceindia.com Key Financials (Standalone) Rs. Crore Particulars FY13 FY14 FY15E FY16E FY17E Net Sales 20172 20280 23599 29252 31929 Growth 9.5% 0.5% 16.4% 24.0% 9.2% EBIDTA 4675 3818 4606 5899 6426 EBIDTA Margin 23.2% 18.8% 19.5% 20.2% 20.1% PAT 2656 2144 2296 2855 3226 NPM 13.2% 10.6% 9.7% 9.8% 10.1% EPS 96.9 78.3 83.7 104.0 117.6 ROE 17.4% 12.5% 12.0% 13.2% 13.1% ROCE 17.2% 11.3% 11.1% 12.9% 13.1% Net Worth 15235 17098 19127 21668 24556 BVPS 556 624 697 790 895

Transcript of Choice Broking Research-UltraTech Cement.

UltraTech Cement Rating Matrix

CMP Rs. 3121

Rating Buy

Potential Price Range Rs.3400-Rs. 3550

Target Period 12 Months

Upside Potential Upto 14%

52 week H/L Rs 3,196/1,820

Face value Rs.10

Sector Cement

ULTRATECH CEMENT LIMITED is a leading cement manufacturing company in India with total 63 Million Tonnes/annum installed capacity. UltraTech Cement, being the most aggressive among its peers in adding capacity, has highly efficient operations and sizeable capacity to remain the major beneficiary of acceleration in demand growth in Indian economy.

Cement Consumption Witnessing Improvement Cement industry, being highly sensitive to country’s GDP growth, has been witnessing improvement in demand during current fiscal led by recovering economic scenario. Revival in construction activity, increasing demand from housing sector, low base of last year as well as delayed onset of monsoons this year has augmented the domestic consumption. Indian cement industry has shown significant recovery in demand and profitability in FY15. The growth in cement production picked up to 7.9% during the first nine months of FY15 as against 3.7% in the corresponding period last fiscal. We expect a strong recovery in Indian cement demand led by thrust of government given for infrastructure development, low-cost affordable housing projects and setting up of smart cities. UltraTech to remain Prime Beneficiary of Acceleration in Demand Growth UltraTech is a leading cement manufacturing company in the country having 63 MT/annum installed capacity and accounts for around 17% of domestic market revenue. UltraTech, being the largest pan India player, will be the major beneficiary of acceleration in demand growth in the Indian markets. UltraTech is also the lowest-cost producer amongst Indian cement players, moreover proactive initiatives taken by the management to save energy and logistics cost will further strengthen the company position in market.

Shareholding Pattern as on Dec 2014

Particulars Dec'14 Sep'14 Jun'14 Mar'14

Promoters 61.7% 61.7% 61.7% 61.7%

FIIs 19.5% 19.9% 20.4% 21.0%

DIIs 5.9% 5.7% 5.3% 4.9% Non Institutions 10.6% 11.0% 10.8% 10.6%

Others 2.3% 1.8% 1.8% 1.8%

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Key Financials (Standalone) Rs. Crore

Particulars FY13 FY14 FY15E FY16E FY17E

Net Sales 20172 20280 23599 29252 31929

Growth 9.5% 0.5% 16.4% 24.0% 9.2%

EBIDTA 4675 3818 4606 5899 6426 EBIDTA Margin 23.2% 18.8% 19.5% 20.2% 20.1%

PAT 2656 2144 2296 2855 3226

NPM 13.2% 10.6% 9.7% 9.8% 10.1%

EPS 96.9 78.3 83.7 104.0 117.6

ROE 17.4% 12.5% 12.0% 13.2% 13.1%

ROCE 17.2% 11.3% 11.1% 12.9% 13.1%

Net Worth 15235 17098 19127 21668 24556

BVPS 556 624 697 790 895

UltraTech Cement

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Aggressive Capacity Expansion to lead to Volume Growth for Company To keep volume growth ahead of other players, the company adopts a strong aggressive expansion policy and has made capacity expansion of CAGR of 23% as compared to peer’s average CAGR of 13% over the past five years. UltraTech has earmarked Rs.10,000 crores to be incurred in setting up the remaining grinding units, clinkerisation plants, cement terminals and brownfield expansion in Rajasthan. These are likely to be commissioned in a phased manner by 2015. The acquisition of the 4.8 MTPA Gujarat Cement Unit of Jaypee Cement Corporation also strengthened its presence in the growing Western market. Moreover, the latest acquisition of ‘Jaiprakash Associates’ two cement units and associated power plants in Madhya Pradesh (MP) will help UltraTech to strength the presence in eastern side of MP. Healthy Operating Cash Flow and low debt/equity to Fuel Expansion Operating cash flows for UltraTech is expected to remain over Rs.4,000 crore annually during the projected FY14-19E period. The company is well positioned to reap the benefit of a recovery in domestic demand and will generate healthy free cash flows during the forecasted five years period. Furthermore, with a minimal debt in capital structure, UltraTech has strong balance sheet and ongoing capacity expansion plans are not expected to add any pressure to balance sheet. Valuations To value the UltraTech stock, we conducted fundamental analysis using the Economy-Industry-Company (E-I-C) framework and used the Discounted Cash Flow (DCF) as well as Relative Valuation (RV) methods. On the basis of DCF and RV, we arrived at Potential Price Range of Rs.3400-Rs.3550 for a period of 12 months. With the double digit potential upside, we have a ‘BUY’ recommendation on the stock.

UltraTech Cement

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DCF VALUATION Rs. Crore Particulars FY12 FY13 FY14 FY15E FY16E FY17E FY18E FY19E Net Sales 18427.4 20172.4 20279.8 23599.0 29252.0 31928.8 36885.8 40576.9 EBITDA 4242.6 4674.6 3817.9 4605.8 5899.1 6426.5 7687.8 8861.7 NOPLAT 3295.6 3504.6 3186.9 3773.8 4647.4 5092.0 6147.3 7040.8 Free Cash Flows 236.6 402.1 201.9 1485.6 -1563.3 1560.9 1172.6 5984.8

It is assumed Free Cash flow beyond FY19 grows at 8% PV of Estimated FC Flows 1326.8 -1246.8 1111.8 745.9 3399.8 Horizon Value 162617.3 PV of Estimated Perpetuity Flows 92377.6 Total Present Value (EV) 97715.0

Fundamental Value of Equity 92842.2 No of Outstanding Shares 27.4 Beta 1.11 Fundamental Value per Share Rs.3383.5 WACC 11.97%

DCF Sensitivity Rs. Crore Continuing Growth (%) Weighted Average Cost of Capital (%)

11.00% 11.50% 11.97% 12.00% 12.50% 13.00% 14.00%

6.00% 2768 2460 2215 2203 1987 1802 1504

6.50% 3087 2716 2427 2413 2162 1949 1612

7.00% 3487 3030 2682 2665 2368 2121 1735

7.50% 4000 3422 2993 2973 2615 2323 1876

8.00% 4684 3926 3383 3358 2918 2567 2042

8.50% 5642 4598 3886 3853 3296 2864 2238

9.00% 7078 5538 4557 4513 3783 3236 2472

Relative Valuation

Particulars FY12 FY13 FY14 FY15E FY16E FY17E FY18E FY19E

BVPS 469.3 556.0 624.0 697.1 789.7 894.9 1030.4 1190.3

EBIDTA (RS. Crore) 4242.6 4674.6 3817.9 4605.8 5899.1 6426.5 7687.8 8861.7

Valuation Parameters P/BV EV/EBIDTA

Industry Average 4.53 18.2 At CMP of Rs.3121, the stock is trading at 3.95x its FY16E BVPS of Rs.789.7, 3.49x FY17E BVPS and 16.1x of its EV/EBIDTA FY16E and 14.1x EV/EBIDTA FY17E. On the basis of Relative Valuation we arrive at Potential Price at Rs.3580.

Peer Group Analysis (@TTM Price) ACC (2014) Ambuja Cement (2014) Ultra-tech Cement (FY14)

Market Cap. ( Rs Crore) 26,636.3 33,699.3 68,511.9

Book Value 8,235.61 10,103.33 17,097.51

Debt / Equity 0.00 0.002 0.28

P/E (Trailing) * 22.78 22.49 32.0

P/BV 3.23 3.34 4.0

EV/EBIDTA 17.47 16.21 19.1

P/Sales 2.27 2.67 1.3

EPS 62 9.7 78

Return on Net Worth 13.3% 12.8% 12.5%

UltraTech Cement

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Improving Indian Economic Condition Cement industry is highly correlated to economic scenario as cement demand is largely depended upon housing segment and growing industrial and infrastructure sector. Indian cement industry volumes grow 1‐1.2x India’s GDP. After registering an average growth rate of 8% during FY08-FY12, Indian economic growth had slowed down to below 5% (with 2004-05 base year) during the past two financial years. Prevailing high interest rate, stubborn inflation, low investments and slow execution of infrastructure projects were the leading factors, impacted country’s economy growth. However, Indian economy has shown signs of nascent recovery and grew by 5.5% during the first half (April-September) of FY15 as compared to 4.9% in the same period in FY14. Besides, key macro-economic indicators such as inflation, industrial production, CAD and infrastructure activity are also reviving, putting positive influence on economic growth. Industrial production during April-December FY15 grew by 2.1% as against 0.1% in the April-December FY14, indicating that the economy is far better position now from previous fiscal. Indian economic growth is likely to improve to 5.5% in FY15 and further enhanced to 6-7% in FY16 and FY17. Improved consumers sentiments, the renewed policy thrust by new government and a pickup in consumer demand are likely to provide impetus to economic growth in coming future. We expect 8% growth for Indian economy during the stable growth period. With the gradually growing Indian economy, per capita income of people in India has been growing at a pace of CAGR of 10% over the eight years. Household income in the top 20 boom cities in India is expected to grow at around 10% annually over the next ten years, which is likely to increase cement demand.

129.9 138.4 145.3

154.7 160.5 167.6

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UltraTech Cement

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Industry Scenario Indian cement industry has evolved significantly over the last two decades and today the sector is aptly described as the next sun rise sector to Indian economy. The Indian cement Industry is very large, second only to China in terms of installed capacity at around 380 Million Tonnes (MT) per annum, and has grown at a brisk pace in recent years on back of rising infrastructure activities, increasing demand from housing sector and industries. India is the second largest producer of cement and housing sector is the biggest demand driver of industry, accounting for about 65% of the total country’s consumption. Infrastructure and commercial real estate & industrial sector constitute 20% and 15% share in total domestic cement demand. Indian cement industry is highly organized with top 12 cement firms have around 70% share in the total country’s demand. However, India’s per capita consumption of cement still remains substantially lower at 195 kg when compared with the world average at 520 kg, showing strong growth potential in the domestic market. Over the past two fiscals, cement demand in India remained sluggish due to the economic recession, forcing the manufactures to operate at low capacity at around 72%. Amid expectation of strong growth in future, industry added 65 MTPA cement capacities between

FY11-FY14, as against 92 MTPA in FY08-FY11.

Capacity, Demand Growth

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UltraTech Cement

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Revival in Economic Growth to provide Impetus to Sector The cement demand scenario in India has improved significantly in current fiscal driven by reviving economic condition. The growth in cement production picked up to 7.9% during first nine months of FY15 as against 3.7% in the corresponding period last fiscal and 3.0% in FY14. The outlook looks very much promising for domestic cement industry given the huge untapped housing demand and increasing infrastructure development in the country. Cement consumption is expected to improve to 6.1% in FY15E from 2.5% in FY14. With the expectation of 8.5-9% growth in coming years, all-India cement capacity utilization is likely to improve to around 80% by FY17. Furthermore, industry players are presently also benefiting from easing of cost side pressures. Power & fuel and freight costs are the major costs for industry with a share of 28% and 29% in the operating cost structure. Global coal and diesel prices have declined by around 20-25% during the past twelve months which is expected to reduce the power & fuel and freight costs for cement companies. Financial Forecasts and Projections (UltraTech Cement) We expect net sales of the company to grow at a CAGR of 14.9% between FY14-FY19E mainly led by volume improvement on the back growing economy. Cement volumes are expected to grow by a CAGR of 9% to 63.75 MT in FY19E from 41.13 MT in FY14. EBIDTA margin is expected to improve to around 20% in next three forecasted years and further rise to 22% by FY19, given the company ongoing initiatives to control the operating expenditures mainly fuel and freight costs. We expect net profits to grow at a CAGR of 18% between FY14-FY19E as we believe that growth going forward is likely to be led by volume as well as strong pricing improvement in FY18E and FY19E.

UltraTech Cement

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Company Analysis ULTRATECH CEMENT LIMITED is a leading cement manufacture company in India with total 63 Million Tonnes (MT) installed capacity. Earlier the company was incorporated on 24th August 2000 as Larsen & Toubro cement, however it was demerged and acquired by Grasim later and renamed as Ultra Tech Cement in 2004. UltraTech has 11 composite plants, 101 ready-mix concrete plants, one white cement plant, one clinkerisation plant, 15 grinding units and six bulk terminals. The company has wide spread retail network in the country and thus accounts for around 17% share in total revenue of the Indian cement industry. Besides, the company exports market span countries around the Indian Ocean, Africa, Europe and the Middle East. The company has maintained its leadership position in industry supported by a strong product profile, premium brand image, geographically widespread manufacturing facilities and extensive distribution network. To keep volume growth ahead of peer members, the company adopts a strong aggressive expansion policy and has witnessed capacity expansion of CAGR of 23% as compared to peer’s average CAGR of 13% over the past five years. Products and Services UltraTech Cement provides a host of products ranging from grey cement to white cement, from building products to building solutions and an assortment of ready mix concretes catering to varied needs and applications of the construction industry. Though, company’s flagship cement products come into the category as Ordinary Portland Cement, Portland Blast Furnace slag Cement and Portland Pozzolana Cement. Among these, Ordinary portland cement is most commonly used for a wide range of applications such as dry-lean mixes, general-purpose ready-mixes, high strength pre-cast and pre-stressed concrete. On the other hand, Portland blast-furnace slag cement, having lighter colour, better concrete workability and flexural strength, is used in a concrete mixture to make concrete better and more consistent. The uses of portland pozzolana cement give strength and enhance durability and helps in minimizing shrinkage and thermal cracking, increases workability and cohesion in concrete and mortar.

UltraTech Cement

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Business Model Analysis Core Capabilities: Superior quality cement, concrete and allied products and superior strength for durable structure that can weather any condition are the top features of the company which derived the UltraTech to market leader position. Apart from that, well-spread network with multiple logistic feed, bringing in innovation in every application, connectivity and ensure availability of products and deep collaboration with customers in providing end-to-end solution are the other core capabilities of the firm, driving the company growth. The company has also showed significant process on technological front. To improve process efficiency and product quality, the company is using different newer generation, mathematical and computational modeling. The company has also made multiple collaborative research projects with national and international institutes for future generation building materials, providing training to R&D personnel and increased focus towards energy conservation through various in-house initiatives. Robust development on technological front has been helping the firm to reduce specific energy consumption, increase use of alternative fuels, compliance with PAT (Perform, Achieve and Trade) targets and decline the operation costs and improve product quality. Premium Product Quality, Uses of New Technology adding Value to Firm The Company is specialized in cement manufacturing product and thus primarily generates revenue by the sale of cement. Top features of the firm such as to provide premium quality cement, concrete and allied products, maintain well distributed sales network, uses of new technology and strong aggressive expansion policy approach have been directly contributing toward the value addition of the company. As the company has been maintained strong value proposition, UltraTech has become the most trusted and preferred brand of engineers, builders, contractors and individual house builders and its cement is used in vital structures such as dams, bridges, flyovers, airports, metro railways apart from residential and commercial structures. UltraTech Cement has been honoured with the title of the consumer validated award 'SUPERBRAND' for the years 2011, 2012, 2013 and 2014 by the Superbrands Council, a global organisation that recognizes, showcases and pays tribute to the best brands in each country.

UltraTech Cement

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Targets Customers: UltraTech’s business is mainly driven by the construction activity, which includes infrastructure development and housing segment. About 40% of the demand comes from rural housing, while 20% comes from urban housing, 20% from infrastructure, and the balance from other commercial construction. Amid expectation of strong growth in infrastructure segment, the company has also started focusing on infrastructure development over the recent years. Some of the India's most ambitious infrastructure projects such as Bandra Worli Sea Link, Kolkata and Bangalore metro link are powered by UltraTech. Growing economy leading to high demand from housing segments and increasing infrastructure development in the country are likely to provide impetus to company growth in future. Diversified Presence with Well Distributed Network across India UltraTech cement has well distributed network sales mix across India, however majority of revenue coming from northern and western India at around 30% and around 29%. Though, the company has strong present in all regions of the country. UltraTech has robust logistics network of 30 plants, 500 plus warehouses and 150 plus railheads and 50000 plus dealers, retailers and institutional customers. With the robust processes for planning, distribution, network design, order execution, visibility and optimal resource utilization, UltraTech serves 14000 orders per day by using a mix of various logistics modes including rail, road and sea, keeping its average realization healthy as compared to the peers. With an eye on the future, UltraTech is adopting some best in class Supply Chain Management (SCM) processes such as web and mobile based order management system with real time visibility of order status, customer service level measurement on real time basis, GPS based vehicle tracking system for dedicated fleet and automation at secondary service points like railheads and godowns.

Business Analysis UltraTech collects 99% of revenue from the domestic markets. In the Indian market, UltraTech cement is the market leader and accounts for around 17% share in the cement business followed by ACC Cement and Ambuja Cement with a share of around 8% and 7%. Ultratech’s main business-cement production is characterized by high capital intensity, solid barriers to entry, high energy intensity; besides the company's strong investment in plant efficiency has helped establishing solid cost-competitiveness in regional markets. The company will continue its dominance in the domestic market.

North 30%

West 29%

East 15%

South 20%

Exports 6%

Regional Presence

UltraTech Cement

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Sales Volume likely to witness Firm Recovery in Future In line with the industry trend, sales growth of the UltraTech cement was remained sluggish over the past two fiscal owing to the prevailing economic slowdown. Indian economy’s growth declined to a decade low at 4.5% in FY13 and 4.7% during FY14 (with 2004-04 base year). Sluggish infrastructure development in the country as well as subdued demand for India’s housing sector owing to the prevailing high interest rates as well as high inflation are the leading factors responsible for the declining domestic cement consumption. During the FY14, sales growth has remained flat at Rs 20,279 crore, while net profit declined by 19% YoY to Rs.2144 crore due to the high operating expenditure amid low demand. However, the situation is improving and the recent quarter (Q3FY15) financial result indicated strong growth in volume. UltraTech sales volume grew by 16% to Rs.5601.4 crore in Q3FY15 from Rs.4818 crore in the same quarter of previous fiscal. Despite showing strong performance in sales volume, net profit of the company declined marginally by 1.5% due to the high finance cost rose 70% to Rs.153.9 crore from a year ago. Though EBIDTA margin during the reported quarter was rose to 20% YoY driven by high sales volume. Improving fundamentals of Indian economy are providing impetus to domestic demand. During the 9MFY15, sales volume increased by 17% to Rs.16722.8 crore from Rs.14319.9 crore in 9MFY14. We expect a strong recovery in sales volume at CAGR of 14.9% to Rs.40576.9 crore in FY19E from Rs.20279.8 crore recorded in FY14.

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Sales Growth (up 16% YoY) robust during Q3FY15 (Rs. Crore)

UltraTech Cement

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Cost Analysis Among total operating expenditure, power and fuel and freight are the two major expenditure of the company with a share of around 25% and 27% in the total company expenditure. UltraTech’s continued focus on controlling cost and optimization of fuel mix helped in curtailing cost to some extent. Power and fuel cost eased by around 6% YoY to Rs.1005 per sales tonne during FY14. Ongoing focus on improving efficiencies in consumption, increasing usage of pet coke and alternative fuel and softening in imported coal prices helped the company to lower energy cost. However, the saving in energy cost was offset by the soaring fright cost. The company reported freight and forwarding cost at Rs.4580 crore in FY14 which was around 8.45% higher on annual basis. Furthermore, during the first nine month of this fiscal, freight and forwarding cost increased by 22% to Rs.3939.5 crore as compared to Rs.3215.3 crore during the same period of corresponding fiscal. Freight cost is likely to increase at a CAGR of 12.4% during FY14-FY19E. On the other hand, power and fuel cost is expected to remain Rs.1100-1200 per tonne during FY14-FY17E. EBIDTA margin of the company, which declined to 18.8% in FY14, is expected to improve to above 20% in next five year mainly driven by high revenue growth as well as company continued policy for cost control and optimization of fuel.

EBIDTA Margin to Improve in Coming Years

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UltraTech Cement

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Realization to pick up led by Improving Demand Amid expectation of strong growth in future arising out of the thrust given for infrastructure development in the country by the government, industry witnessed Rs.50,000 crore rapid expansions during 2007-2014 to nearly double cement capacity from 180 MT, fastest in domestic sectors history. As against the CAGR of around 12% witnessing during FY08-FY14, Indian cement consumption grew by CAGR of about 8-9%, forcing the manufactures to operate at low capacity. On the other hand, cement prices continued to remain under pressure owing to the weak demand, impacting margins of the industry players. In line with the industry, UltraTech capacity utilization declined below 70% in FY14 and realization per tonne also remained sluggish due to the prevailing low cement prices in the market driven by subdued demand and over-capacity. However, an improvement in realization is expected on the back of recovery witnessing in the domestic economy leading to rise in Indian cement consumption. Realisation per tonne is expected to improve to Rs.5,150/tonne in by FY16E and Rs.5,408/tonne in FY17E. Installed capacity is likely to increase to 71 MT by FY16E and capacity utilization is projected to remain at 80-85 MT in the next five years.

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UltraTech Cement

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UltraTech’s Net Profit to Improve during Projected Period During the FY14, net profit declined to Rs.2,144 crore which was 19% lower than the previous year profit. In spite of sluggish revenue due to economic recession, high operating cost also put pressure on the margin. With the recovery in economic situation, the financial condition of company has improved and during first three quarter of FY15, PAT grew significantly by 7.2% to Rs.1399 crore. Company’s PAT is expected to increase to Rs.3226.1 crore in FY17E and further enhance to Rs.4903.5 crore in FY19E. Accordingly, Return on Equity (ROE) is likely to improve to 13.1% in FY17E and 15% in FY19E from 12.5% in FY14.

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UltraTech Cement

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Low Debt/Equity to fuel Capital Expansion UltraTech cement has strong balance sheet with minimal debt (D/E of 0.3:1) as compared to other industry players. Though company D/E ratio is likely to increase to 0.44 in FY15E due to the debt financing required for acquisition of Jaiprakash Associate plant located in Madhya Pradesh, this expansion plan will not put any stress to the balance sheet and in turn will further strengthen the company’s position in the industry. Furthermore, the company has made a strategy to maintain highest credit rating for both long- and short-term debt which in turn is helping firm to attract the best proposals from lending agencies at fine pricing levels.

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UltraTech Cement

www.choiceindia.com

Growth Strategies Considering that freight cost accounting for around 28% of the total expenditure, UltraTech has been taking certain initiatives to control logistic cost. As cement is extremely bulky commodity, the firm is investing optimum mix of rail, road and sea transportation, which will lead to the quick dispatch of material from the plants, as well as better customer service and lowered freight cost. Furthermore, the company is also investing to enhance power capacity, which stands at around 709 mega watt and caters to around 80% of Company’s power requirement. Continued initiatives for cost optimization are likely to improve EBIDTA margins in coming years. UltraTech focus on creation on new capacities through organic and inorganic growth. Despite the slowdown in the cement industry, UltraTech acquired the 4.8 mtpa Gujarat Cement Unit of Jaypee Cement, moreover, company organic capacity expansion plans are also on track to cater well the increasing demand from the housing and infrastructure sectors. Acquisition of JP Associates' MP plant to enhance UltraTech Market presence UltraTech Cement planned to acquire Jaiprakash Associates' two cement units and associated power plants in Madhya Pradesh for Rs.5,400 crore. Among these units, one plant is situated at Bela, Madhya Pradesh with clinker capacity of 2.1 MTPA and cement grinding capacity of 2.6 MTPA along with captive power plant (CPP) of 25 MW. Other integrated cement plant include clinker capacity of 3.1 MTPA and cement grinding capacity of 2.3 MTPA at Sidhi, MP along with CPP capacity of 155 MW. This acquisition deal will provide impetus to growth as UltraTech does not have a significant presence in eastern side of MP, while these are well established assets with good market share. Outlook We believe that likely revival in economic growth, India’s low per capita consumption of cement, increasing urbanization and reviving growth in infrastructure and industrial sectors will continue to act as the driving forces behind the rise in demand of cement. To value the UltraTech stock, we conducted fundamental analysis using the Economy-Industry-Company (E-I-C) framework and used the Discounted Cash Flow (DCF) as well as Relative Valuation (RV) methods. On the basis of DCF and RV, we arrived at Potential Price Range of Rs.3400-Rs.3550 for a period of 12 months. With the double digit potential upside, we have a ‘BUY’ recommendation on the stock.

UltraTech Cement

www.choiceindia.com

Key Risk Economic Uncertainties: Demand of cement in India is cyclical and barring short term disruptions it grows entirely in tandem with economic growth. UltraTech Cement demand is mainly derived from the domestic housing real estate and infrastructure sectors, which are closely linked to overall economy’s growth. Though, Indian economy growth is reviving, prevailing high interest rates in order to contain the inflation can impact the housing sector’s demand and infrastructure development. Excess Cement Capacity in Industry to Put Pressure on Realization: Currently, India’s cement production capacity stands at around 380 MT, which is over 100 MT higher than around 262 MT cement demand. The industry had created the capacity on the back of government's projection of potential cement demand arising out of the thrust given for infrastructure development in the country and the allocation of funds earmarked for the purpose. Though, the demand of cement is likely to improve in coming years, the surge in cement price would be marginal in next two fiscal as one fourth of the industry’s capacity is presently remain unutilized. Rising Cost of Manufacturing: EBIDTA margin of the company declined to 18% in FY14 from around average 23% EBIDTA margin recorded in previous few fiscal on account of high raw material and freight expenditures. Therefore, managing these costs at appropriate level could a challenge for management going forward. Growing Presence of Regional Players: The presence of small players has been growing across some region of the country. Most of these cement players have been constantly increasing their installed capacity in order to cater to increasing cement demand. Besides this, they are also creating fierce or irrational competition in regional markets that leads to unfavorable pricing also would compromise UltraTech Cement’s profitability. Government Regulations: Cement industry is a freight intensive sector and transporting cement and coal over long distances can prove to be expensive for industry players. Therefore, the Government decision to hike the rail freight rate can put pressure on industry margins.

UltraTech Cement

www.choiceindia.com

Profit And Loss Statement (Rs. Crore) Balance Sheet (Rs. Crore)

Particulars FY13 FY14 FY15E FY16E FY17E FY18E FY19E

Net Sales 20172.4 20279.8 23599.0 29252.0 31928.8 36885.8 40576 % Growth 9.5% 0.5% 16.4% 24.0% 9.2% 15.5% 10.0%

Total Revenue 20478.7 20608.7 23948.1 29627.1 32344.0 37338.6 41068 % Growth 9.5% 0.6% 16.2% 23.7% 9.2% 15.4% 10.0%

EXPENDITURES Staff Costs 968.4 1014.6 1145.7 1401.7 1552.6 1799.3 1966.7

% of Net Sales 4.8% 5.0% 4.9% 4.8% 4.9% 4.9% 4.8%

Other Operating costs 11387.6 12011.1 13599.7 16978.3 18560.3 21052.1

22850.5

% of Net Sales 56.5% 59.2% 57.6% 58.0% 58.1% 57.1% 56.3% Other Expenses 3141.9 3436.2 4247.8 4972.8 5389.5 6346.5 6898.1

% of Net Sales 15.6% 16.9% 18.0% 17.0% 16.9% 17.2% 17.0% Total Expenditures 15497.8 16461.9 18993.2 23352.9 25502.4 29198.0

31715.2

% of Net Sales 76.8% 81.2% 80.5% 79.8% 79.9% 79.2% 78.2% EBITDA 4674.6 3817.9 4605.8 5899.1 6426.5 7687.8 8861.7 EBITDA Margin % 23.2% 18.8% 19.5% 20.2% 20.1% 20.8% 21.8% Growth % #REF! -18.3% 20.6% 28.1% 8.9% 19.6% 15.3%

Depreciation & Amortisation 945.4 1052.3 1274.3 1579.6 1724.2 1936.5 2110.0 EBIT 3729.2 2765.6 3331.5 4319.5 4702.3 5751.3 6751.7 Financial Charges 210.0 319.2 552.5 588.2 556.9 510.0 518.5

Other Income 306.3 328.9 349.1 375.1 415.1 452.8 491.1 PBT 3825.5 2775.3 3128.1 4106.5 4560.5 5694.1 6724.3 Pre-tax Margin % 19.0% 13.7% 13.3% 14.0% 14.3% 15.4% 16.6% Tax 1170.0 631.0 832.0 1251.8 1334.5 1540.5 1820.8 Effective Tax Rate % 30.6% 22.7% 26.6% 30.5% 29.3% 27.1% 27.1%

Reported PAT 2655.5 2144.3 2296.1 2854.7 3226.1 4153.6 4903.5 Net Profit Margin % 13.2% 10.6% 9.7% 9.8% 10.1% 11.3% 12.1%

Growth in Reported PAT % #REF! -19.3% 7.1% 24.3% 13.0% 28.8% 18.1% Extrodinary Income 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Adjusted PAT 2655.5 2144.3 2296.1 2854.7 3226.1 4153.6 4903.5 Shares In Issue 27.4 27.4 27.4 27.4 27.4 27.4 27.4

Adjusted EPS 96.9 78.3 83.7 104.0 117.6 151.4 178.7

Particulars FY13 FY14 FY15E FY16E FY17E FY18E FY19E

Gross Asset 21447.5 25252.3 27846.6 33235.0 36803.7 41994.6 43900.2

Accumulate Depreciation 9377.3 10651.6 10651.6 12231.2 13955.4 15891.9 18001.9

Capital WIP 3505.3 2038.4 2769.8 3743.4 4163.5 4235.9 4453.2 Net Fixed Asset 16627.7 17913.5 19964.8 24747.2 27011.8 30338.5 30351.5

Investments & Deposits 6091.9 6571.7 10957.0 9516.7 9803.5 9741.7 14826.1 Current Asset 4689.3 5268.3 5856.7 7066.9 7838.6 9175.8 9982.2 Cash 142.7 277.5 244.7 301.1 328.2 410.5 426.7 Inventories 2350.5 2368.4 2870.3 3409.6 3769.1 4365.2 4814.3 Trade Debtors 1017.2 1281.0 1177.6 1493.1 1709.7 2004.0 2118.4 Loans and Advances 1173.2 1326.2 1554.7 1849.5 2016.6 2376.9 2604.0 Other Current Assets 5.7 15.3 9.4 13.6 14.9 19.1 18.7 Current Liabilities & Provisions 5669.6 5347.7 6717.3 7818.1 8753.8 10049.2 11564.4 Net Current Asset Excluding Cash -1123.0 -356.8 -1105.3 -1052.3 -1243.4 -1283.9 -2009.0 Capital Deployed 21739.3 24405.9 30061.2 33512.7 35900.1 39206.8 43595.4

Non-Current Liabilities

Borrowings 4462.7 4872.8 8500.0 9410.8 8910.8 8500.0 8500.0 Other Long-term Liabilities 2.3 1.8 0.0 0.0 0.0 0.0 0.0 Deferred Tax Liabilities 1905.9 2295.8 2295.8 2295.8 2295.8 2295.8 2295.8 Long-term Provisions 134.0 137.9 137.9 137.9 137.9 137.9 137.9 Total Liabilities 6504.9 7308.4 10933.8 11844.6 11344.6 10933.8 10933.8 Contingent Liabilities Share Capital 274.2 274.2 274.3 274.4 274.4 274.4 274.4

Reserve and Surplus 14960.6 16823.3 18853.1 21393.8 24281.1 27998.6 32387.2 Total Stock Holder's Equity 15234.8 17097.5 19127.4 21668.2 24555.6 28273.0 32661.6 Capital Employed 21739.7 24405.9 30061.2 33512.7 35900.1 39206.8 43595.4 DIFF 0.0 0.0 0.0 0.0 0.0 0.0 0.0

UltraTech Cement

www.choiceindia.com

Cash Flow Statement (Rs. Crore) Financial Ratios (%) (Rs. Crore)

Cash Flow from Operating Activities

Particulars FY13 FY14 FY15E FY16E FY17E FY18E FY19E

Profit before tax 3825.5 2775.3 3128.1 4106.5 4560.5 5694.1 6724.3

Depreciation 945.4 1052.3 1274.3 1579.6 1724.2 1936.5 2110.0

Interest Expense 210.0 319.2 552.5 588.2 556.9 510.0 518.5 Operating Profit Before WC Changes 4980.9 4146.8 4954.9 6274.2 6841.6 8140.6 9352.8

Changes In WC 680.2 -766.2 748.5 -53.0 191.2 40.5 725.0 Gross cash generated from Operations 5661.1 3380.6 5703.4 6221.2 7032.8 8181.1 10077.9

Direct Taxes Paid 1170.0 631.0 832.0 1251.8 1334.5 1540.5 1820.8 Net Cash Generated From Operations 4491.1 2749.6 4871.4 4969.5 5698.3 6640.6 8257.0

Cash Flow from Investing Activities Capital Expenditure (CAPEX) (4042) (2338) (3325) (6362.0) (3988.8) (5263.2) (2123.0)

Investments (840) (479) (4385) 1440.3 (286.8) 61.8 (5084.4) Net Cash Used In Investing Activities (4883) (2817) (7710) (4921.8) (4275.6) (5201.4) (7207.4)

Cash Flow from Financing Activities

Change in Debt 836.1 803.4 3625.4 910.8 -500.0 -410.8 0.0

Change in Equity 0.1 0.1 0.1 0.1 0.1 0.0 0.0

Dividends Paid -289.0 -289.0 -266.2 -314.0 -338.7 -436.1 -514.9

Interest Paid -210.0 -319.2 -552.5 -588.2 -556.9 -510.0 -518.5

Others 8.4 7.3 0.0 0.0 0.0 0.0 0.0 Net Cash used in Financing Activities 345.5 202.6 2806.7 8.6 -1395.6 -1356.9 -1033.4

Net Increase in Cash and Cash Equivalents -46.4 134.4 -32.8 56.3 27.1 82.3 16.3

Cash and cash equivalents At the beginning 189.6 142.7 277.5 244.7 301.1 328.2 410.5 Net Increase in Cash and Cash Equivalents -46.4 134.4 -32.8 56.3 27.1 82.3 16.3 Cash and cash equivalents At the end 143.1 277.0 244.7 301.1 328.2 410.5 426.7

Cash balance as per balance sheet 142.7 277.5 244.7 301.1 328.2 410.5 426.7

Difference 0.5 -0.5 0.0 0.0 0.0 0.0 0.0

Particulars FY13 FY14 FY15E FY16E FY17E FY18E FY19E

Profitability Ratios Return on Assets (ROA) 9.7% 7.2% 6.2% 6.9% 7.2% 8.4% 8.9% Return on Equity (ROE) 17.4% 12.5% 12.0% 13.2% 13.1% 14.7% 15.0% Return on Capital Employed (ROCE) 17.2% 11.3% 11.1% 12.9% 13.1% 14.7% 15.5% Dupont Analysis-ROE Decomposition PAT/PBT (Tax Efficiency) 0.7 0.8 0.7 0.7 0.7 0.7 0.7 PBT/EBIT (Interest Burden) 1.0 1.0 0.9 1.0 1.0 1.0 1.0 EBIT/Sales (OPM) 0.2 0.1 0.1 0.1 0.1 0.2 0.2 Sales/Total Assets (Asset Turnover) 0.7 0.7 0.6 0.7 0.7 0.7 0.7 TA/NW (Financial Leverage) 1.8 1.7 1.9 1.9 1.8 1.7 1.7 ROE 17.4 12.5 12.0 13.2 13.1 14.7 15.0

Liquidity Ratios Current Ratio 0.8 1.0 0.9 0.9 0.9 0.9 0.9 Acid Test Ratio 0.4 0.5 0.4 0.5 0.5 0.5 0.4 Debt-Equity Ratio 0.3 0.3 0.4 0.4 0.4 0.3 0.3

Efficiency Ratios Assets Turnover Ratio 0.7 0.7 0.6 0.7 0.7 0.7 0.7 Working Capital Turnover Ratio -20.6 -255.7 -27.4 -38.9 -34.9 -42.2 -25.6 F.A. Turnover Ratio 1.2 1.1 1.2 1.2 1.2 1.2 1.3 C.A. Turnover Ratio 4.3 3.8 4.0 4.1 4.1 4.0 4.1 Debtors Velocity 18 23 18 19 20 20 19

Margin Ratios (%) EBITDA Margin 23.2% 18.8% 19.5% 20.2% 20.1% 20.8% 21.8% Pre-Tax Margin 19.0% 13.7% 13.3% 14.0% 14.3% 15.4% 16.6% Net Profit Margin 13.2% 10.6% 9.7% 9.8% 10.1% 11.3% 12.1%

Growth Ratios YoY (%) Net Sales 9.5% 0.5% 16.4% 24.0% 9.2% 15.5% 10.0% EBITDA 10.2% -18.3% 20.6% 28.1% 8.9% 19.6% 15.3% Adj.PAT 8.4% -19.3% 7.1% 24.3% 13.0% 28.8% 18.1% Adj.EPS 8.4% -19.3% 6.9% 24.3% 13.0% 28.8% 18.1%

Working Ratios (Days) Inventory 43 43 44 43 43 43 43 Debtors 18 23 18 19 20 20 19

Other Ratios (%) Other Income/PBT 8.0% 11.9% 11.2% 9.1% 9.1% 8.0% 7.3% FCF Margin 2.0% 1.0% 6.3% -5.3% 4.9% 3.2% 14.7% Capex/Sales 20.0% 11.5% 14.1% 21.7% 12.5% 14.3% 5.2%

Enterprise Value 52763.2 55148.3 79324.9 106521.

7 105994.

6 105501.

5 105485.

3 Net Working Capital Excluding Cash -1123.0 -356.8 -1105.3 -1052.3 -1243.4 -1283.9 -2009.0

Per Share (Rs.) Adj.EPS 96.9 78.3 83.7 104.0 117.6 151.4 178.7 CEPS 131.4 116.7 130.1 161.6 180.4 221.9 255.6 DPS 9.0 9.0 9.7 11.4 12.3 15.9 18.8 BVPS 556.0 624.0 697.1 789.7 894.9 1030.4 1190.3 Cash Per Share 5.2 10.1 8.9 11.0 12.0 15.0 15.6

Valuation Parameters P/E 18.2 23.6 31.0 34.1 30.2 23.5 19.9 P/CEPS 13.5 15.8 19.9 22.0 19.7 16.0 13.9 P/BV 3.2 3.0 3.7 4.5 4.0 3.4 3.0 EV/EBITDA 11.3 14.4 17.2 18.1 16.5 13.7 11.9 EV/SALES 2.6 2.7 3.4 3.6 3.3 2.9 2.6

12 Months Average Share Price 1768 1845 2590 3550 3550 3550 3550

UltraTech Cement

www.choiceindia.com

Contact Us

Satish Kumar Sharma Research Associate

[email protected] www.choiceindia.com [email protected]

Disclaimer This is solely for information of clients of Choice Broking and does not construe to be an investment advice. It is also not intended as an offer or solicitation for the purchase and sale of any financial instruments. Any action taken by you on the basis of the information contained herein is your responsibility alone and Choice Broking its subsidiaries or its employees or associates will not be liable in any manner for the consequences of such action taken by you. We have exercised due diligence in checking the correctness and authenticity of the information contained in this recommendation, but Choice Broking or any of its subsidiaries or associates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this recommendation or any action taken on basis of this information. This report is based on the fundamental analysis with a view to forecast future price. The Research analysts for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. Choice Broking has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Choice Broking makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. The opinions contained within the report are based upon publicly available information at the time of publication and are subject to change without notice. The information and any disclosures provided herein are in summary form and have been prepared for informational purposes. The recommendations and suggested price levels are intended purely for stock market investment purposes. The recommendations are valid for the day of the report and will remain valid till the target period. The information and any disclosures provided herein may be considered confidential. Any use, distribution, modification, copying, forwarding or disclosure by any person is strictly prohibited. The information and any disclosures provided herein do not constitute a solicitation or offer to purchase or sell any security or other financial product or instrument. The current performance may be unaudited. Past performance does not guarantee future returns. There can be no assurance that investments will achieve any targeted rates of return, and there is no guarantee against the loss of your entire investment. POTENTIAL CONFLICT OF INTEREST DISCLOSURE (as on date of report) Disclosure of interest statement – • Analyst interest of the stock /Instrument(s): - No. • Firm interest of the stock / Instrument (s): - No.