Ultratech Cement
BSE SENSEX
23,002
S&P CNX
6,987
29 February 2016
Update
| Sector:
Cement
CMP: INR2,767
TP: INR3,372 (+22%)
Buy
Mega deal at favorable valuation for UTCEM
Awaiting clarity on regulatory nods
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val ( INRm)
Free float (%)
UTCEM IN
274.4
3,399/2,531
5/8/10
759.3
11.1
899.9
38.3
Financials Snapshot (INR b)
Y/E Mar
2016E 2017E 2018E
Sales
237.5 265.2 313.3
EBITDA
43.0
53.1
73.6
NP
20.9
28.2
43.2
Adj EPS (INR)
76.3 102.8 157.6
EPS Gr. (%)
3.9
34.8
53.3
BV/Sh (INR)
750.3 835.6 972.9
RoE (%)
10.6
13.0
17.4
RoCE (%)
13.2
16.4
21.7
P/E (x)
36.3
26.9
17.6
P/BV (x)
3.7
3.3
2.8
EV/EBITDA (x)
17.7
13.7
9.4
EV/Ton (USD)
171
164
155
Shareholding pattern (%)
As On
Promoter
DII
FII
Others
Sep-15 Jun-15 Sep-14
61.7
7.1
20.2
11.0
61.7
6.8
20.3
11.3
61.7
5.7
21.7
11.0
FII Includes depository receipts
Stock Performance (1-year)
UltraTech Cem.
Sensex - Rebased
3,600
3,300
3,000
2,700
2,400
Assets that are part of MoU:
UTCEM entered into an MoU with JPA for
22.4mt (clinker 16.2mt) of cement assets at a valuation of INR165b. The deal
comprises (a) 11.4mt in Satna Cluster, 4.8mt in north and 6.2mt in south, (b)
325MW of captive power plants and (c) 40years+ limestone reserve. UTCEM
with 94.5mt capacity (by mid-FY17) would become 4
th
largest capacity holder
in the world (outside China).
What makes the assets attractive for UTCEM?
(a) Demand cycle at the cusp
of acceleration, (b) organic expansion getting costly and time consuming
(land, limestone and approvals) and (c) JPA-portfolio of 12 plants offering
complementary market reach to its existing asset base – thus creating strong
strategic sense.
Regulatory hurdles? Optimist on CCI nod; MMDR contingency remains:
Complementary market mix keeps us optimist on CCI node despite large size
of the deal. 50% of capacities fall in Satna cluster where UTCEM had no
presence. State-wise combined entity’s market share wouldn’t cross 20-30%,
while share in central region would be ~30%. However amendment to MMDR
ACT remains a contingency. Management is optimist on resolution in near
future, followed by deal conclusion of 12-15months by 1HFY18.
Winning valuation for UTCEM, in our views:
At INR165b (plus INR4.7b for
under construction GU of 4mt), implied EV is ~USD110/ton. Adjusting for MP
asset of 4.9mt (IN54b), the incremental assets (17.5mt) come at
~USD100/ton. Currently, JPA has sub-normal utilizations (60-70%) and
EBITDA (<INR500/ton) due to operating constraints like working capital
management. Assuming 6-7% pricing CAGR in FY16-18 and UTCEM’s brand
premium of INR200-250/ton (v/s JPA), the target assets may generate EBITDA
of INR1,000-1,100/ton (v/s INR1,200 for UTCEM) within 12-months of
integration (excluding potential synergies). This, at 75% utilization in FY18,
makes transaction valued at 9-10x 1-year fwd EBITDA.
Synergy benefits not guided, but qualitative hints strong:
Barring natural
brand premium, we expect synergies to emerge from (a) logistics –
complimentary locations to reduce lead distance in north and central, (b)
greater market reach in coastal AP and HP, and (c) resolution of operational
bottlenecks boosting utilizations.
Lower aggression ahead:
We expect UTCEM’s net debt/EBITDA to rise to 2.9x
v/s 0.6x now) on conclusion of the deal, before gradually declining to 1.7-2x
with asset ramp-up and disciplined capex. Being well within UTCEM’s gearing
threshold of 3.5x net debt/EBITDA and 0.75x net DER, management guided
for no major investment in organic capex for next 2-3 years barring select
investment in acquisition of critical resources (land and limestone)
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P
Sandipan Pal
(Sandipan.Pal@MotilalOswal.com); +91 22 3982 5436
Aashumi Mehta
(Aashumi.Mehta@MotilalOswal.com); +91 22 3010 2397