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Ultratech Cements: Research meet extracts
Dec 4, 2008

We recently met up with the management of Ultratech Cements to get the company’s view on the cement sector, its performance and the future prospects of the industry and the company. Here are the key takeaways from the same.

Expansion plans: The company has outlined capital expenditure of little over Rs 46 bn to expand its capacity from 18.2 MT in FY08 to 23.1 MT by the end of FY09, set up captive power plants, expand its jetty, set up RMC (ready mix concrete) units and modernize plants. Out of which, approximately Rs 25 bn has been spent till FY08. The expansion plans are progressing as per schedule.

The company has been the forerunner in terms of capacity additions and hence had the advantage to procure equipment supplies well on time. Hence, the company is confident about its projects going on stream as planned.

Volume growth and pricing environment: The overheated real estate sector has cooled off now. Considering the financial turmoil witnessed globally, financial institutions have tightened their credit norms. This cautious stance has led to a credit crunch and the same has impacted upcoming projects. On account of general economic slowdown and these issues, the demand for cement has moderated. The industry is expected to grow at 7% per annum as against earlier estimates of 8% to 10%. Ultratech Cements may also get affected but the company expects to grow in line with the industry.

We had expected the company to clock 8% YoY growth in volumes for FY09. However, the company’s 1HFY09 performance in terms of dispatches has been higher as compared to our estimates. The company has reported 13% YoY growth in sales volumes (combined cement and clinker). The company’s overall net realisations (net sales /sales volume) have grown by nearly 6% YoY during 1HFY09, while we had estimated flat growth in realisations. Going forward, the company expects to grow in line with the sector.

  • Read - Ultratech Cements’ 2QFY09 performance analysis

    The cost scenario: The increasing cost of operation is inevitable on account of increased cost of sourcing key raw materials like coal. To resolve this problem, the company has taken measures to set up captive power plants. The captive power is likely to satisfy 80% of the company’s requirement. The company’s investment plans clearly reflects its aim to sustain growth and reduce costs.

    The planned investments have been majorly funded through internal accruals. The company had low gearing ratio of 0.5 in FY08 and we expect the same to remain on the lower side going forward.

    What to expect? The cement sector is expected to witness subdued growth of 7% to 8% in the next two to three years as compared to earlier estimates of 8% to 10%. The revised view is the result of global economic slowdown that has also impacted growth of the domestic economy. Growth in volumes offtake will decelerate. Rather than the demand for cement, what worries us is the reverse trend of the all time high realisations once the announced capacities come on stream. From a medium term point of view the sector is likely to garner lower realisations and the same is expected to exert downward pressure on margins apart from cost escalations. However, the prospects of the cement sector for the long term remain intact owing to the need to build up infrastructure to boost economic growth and on account of unfulfilled demand for dwelling units.

    At the current price of Rs 286, the stock is trading at an enterprise value of over Rs 1,800 based on our FY11 estimates, which makes it attractive considering the replacement cost method.

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