Ultratech Cement (ULTCEM)

Event Update
Rating matrix
Rating : Strong Buy
Target : Rs 900
Target Period : 12-15 MONTHS
Potential Upside : 23%
Key Financials
FY08 FY09 FY10E FY11E
Net Sales 5509.2 6383.1 6959.5 7360.4
EBITDA 1720.1 1706.4 2061.9 1752.1
Net Profit 1007.6 977.0 1135.3 967.9
Valuation summary
FY08 FY09 FY10E FY11E
EPS (Rs) 80.4 77.4 90.0 76.7
PE (x) 9.1 9.4 8.1 9.5
Target PE (x) 11.2 11.6 10.0 11.7
EV to EBITDA (x) 6.2 6.0 4.6 4.9
EV/Tonne(US$) 125 100 87 80
Price to book (x) 3.4 2.6 2.0 1.7
RoNW (%) 45.2 31.0 27.5 19.0
RoCE (%) 40.7 29.2 29.7 23.0
Stock data
Stock data
Mcap Rs9210.4 crore
Debt (FY09) Rs 2142.6 crore
Cash & Invest(FY08) Rs 11319 crore
EV Rs 10213.5 crore
52 week H/L Rs 886 / 250
Equity cap Rs 125.2 crore
Face value Rs 10
MF Holding(%)
5.9
FII Holding(%)
Price movement (Ultra tech vs. Nifty)
6.0
1,000
800
600
400
200
0
0
Nov-08 May-09 Nov-09
Analyst’s name
Ravi Sodah
ravi.sodah@icicisecurities.com
UltraTech Cement NIFTY
ICICIdirect.com | Equity Research
6,000
5,000
4,000
3,000
2,000
1,000
WHAT’S CHANGED…
November 16, 2009
PRICE TARGET ............................................................. Changed from Rs 933 to Rs 900
EPS (FY10E) .................................................................................................. Unchanged
EPS (FY11E) .................................................................................................. Unchanged
RATING....................................................................... Changed from Buy to Strong Buy
Multiple expansions to partly mitigate
earnings dilution impact…
News
The board of UltraTech Cement and Samruddhi Cement, a subsidiary of
Grasim Industries, has approved Samruddhi’s merger with UltraTech. The
exchange ratio for the merger was pegged at 4:7 (1:1.75). Samruddhi
shareholders will receive four shares of UltraTech at a face value of Rs 10
each for every seven shares of face value Rs 5 each. Thus, according to
the scheme of the merger UltraTech will issue 14.9 crore new shares.
Implication
The swap ratio of 1:1.75 (as compared to consensus estimates of 1:2) is
marginally negative for UltraTech and marginally positive for Grasim. The
merger is likely to be effected by July 1 2010. Prima facie the merger
ration appears to be EPS decretive (-8%) for FY11 EPS.
Our view
We believe the impact on the share price will be partly mitigated by
expansion of multiples. Post restructuring the valuation multiple for
UltraTech will increase due to the following factors:
• The merged entity will emerge as the largest player with a
capacity of 49 MT, more than double the capacity of distinct
second and third players, viz ACC and Ambuja in the cement
industry
• Historically, UltraTech has traded at a discount to ACC and
Ambuja due to lower liquidity. We believe that post restructuring,
liquidity will no longer be a constraint
• UltraTech will have a presence in all five major regions, thereby
eliminating regional risk
The move is unlikely to provide major cost savings in the near term given
that the cement businesses of Grasim and UltraTech are already
operationally integrated with common branding.
Valuation
UltraTech Cement (ULTCEM)
Rs 730
At the CMP of Rs 730 per, the stock is trading at 8.1x and 9.5x its FY10E
and FY11E earnings, respectively. It is trading at an EV/tonne of $87 and
$80 its FY10E and FY11E capacities, respectively. We are assigning a
STRONG BUY rating to the stock with a price target of Rs 900 per share.

UltraTech (ULTCEM)
ICICIdirect.com | Equity Research
To emerge as a pan-India player
As of now, UltraTech has a presence only in the western, eastern and
southern region. Post restructuring, UltraTech will gain a presence in the
other two regions, viz. northern and central region, thereby eliminating
the regional risk as the quantum and timing of the decline has historically
been different for different regions.
Exhibit 1: UltraTech pre-merger region wise capacity break up
35%
Source: CMA, ICICIdirect.com Research
18%
47%
East West South
Exhibit 2: UltraTech post-merger region wise capacity break up
25%
26%
Source: CMA, ICICIdirect.com Research
8%
25%
16%
North Central East West South
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UltraTech (ULTCEM)
ICICIdirect.com | Equity Research
To emerge as a global giant
The merged entity will emerge as the largest player in India with a
capacity of 49 MT, more than double that of ACC and Ambuja. The
merged entity will be bigger than the entire Pakistan cement industry (44
MT) put together and among the top 10 cement giants in the world. As of
now, global cement players are trading at double the P/E multiple
commanded by UltraTech despite having lower return ratios.
Given the lower liquidity of UltraTech, ACC and Ambuja have so far been
preferred companies with institutional investors who were looking for an
exposure to the Indian cement sector. The new consolidated entity can
potentially provide investors with another pure cement play in India.
Exhibit 3: Global cement giants
300
270
240
210
180
150
120
90
60
30
264 258
1) Lafarge-France
2) Holcim-Swizeland
134
3) CNBM-China
116
4) Heidelberg- Germany
Source: ICICIdirect.com Research
Valuations
100 93
5) Cemex - Mexico
6)Anhui Conch - China
73
7)ItalCementi - Italy
57 51 49 45 39 37 35 35
Though prima facie the swap ratio appears to be EPS decretive, the full
impact of the same is largely going to be mitigated by the expansion in
the multiple on account of reduction in the regional risk, improvement in
liquidity (driven by increased free float) and increase in size. At the CMP
of Rs 730 per share, the stock is trading at 8.1x and 9.5x its FY10E and
FY11E earnings, respectively. It is trading at an EV/tonne of $87 and $80
its FY10E and FY11E capacities, respectively. We are assigning a
STRONG BUY rating to the stock with a price target of Rs 900 per share.
8)Taheiyo-Japan
9) CRH-Ireland
10) AV Birla -India*
11) Buzzi Unichem - Italy
12) Eiro Cement
13)Cimpor - Portugal
14) Jdong- China
15) Hauxin- China
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UltraTech (ULTCEM)
ICICIdirect.com coverage universe
ACC Sales (Rs Crore) EPS (Rs) PE (x) EV/EBITDA (x) RoNW (%) RoCE (%)
Idirect Code ACC CMP 736 CY08 7,308.6 62.5 11.8 7.3 25.9 32.8
MCap 14523 Target 790 CY09E 8,048.3 87.9 8.4 5.1 30.1 38.9
% Upside 7% CY10E 8,371.1 64.3 11.5 6.5 19.1 24.8
Ambuja Cements Sales (Rs Crore) EPS (Rs) PE (x) EV/EBITDA (x) RoNW (%) RoCE (%)
Idirect Code GUJAMB CMP 85 CY08 6,234.7 7.4 11.4 7.0 21.9 27.7
MCap 13399 Target 83 CY09E 6,942.8 8.6 9.9 6.2 21.3 28.3
% Upside -2% CY10E 6,855.5 7.8 10.9 5.4 16.8 22.8
UltraTech Cements
Sales (Rs Crore) EPS (Rs) PE (x) EV/EBITDA (x) RoNW (%) RoCE (%)
Idirect Code ULTCEM CMP 730 FY09 6,383.1 77.4 9.4 6.0 31.0 29.2
MCap 9210 Target 900 FY10E 6,959.5 90.0 8.1 4.6 27.5 29.7
% Upside 23% FY11E 7,360.4 76.7 9.5 4.9 19.0 23.0
Shree Cement Sales (Rs Crore) EPS (Rs) PE (x) EV/EBITDA (x) RoNW (%) RoCE (%)
Idirect Code SHRCEM CMP 1701 FY09 2,715.0 165.9 10.3 6.4 61.4 33.9
MCap 5928 Target 1845 FY10E 3,594.5 221.2 7.7 3.8 49.2 32.4
% Upside 8% FY11E 3,951.6 208.2 8.2 4.5 32.2 24.3
India Cements Sales (Rs Crore) EPS (Rs) PE (x) EV/EBITDA (x) RoNW (%) RoCE (%)
Idirect Code INDCEM CMP 104 FY09 3,426.5 17.2 6.0 4.5 17.4 17.0
MCap 2917 Target 105 FY10E 3,926.8 16.4 6.3 3.8 14.6 14.9
% Upside 1% FY11E 4,348.1 12.9 8.0 4.7 10.2 10.6
JK Cement Sales (Rs Crore) EPS (Rs) PE (x) EV/EBITDA (x) RoNW (%) RoCE (%)
Idirect Code JKCEME CMP 119 FY09 1,496.8 21.1 5.7 5.4 17.7 17.2
MCap 834 Target 155 FY10E 1,778.4 30.1 4.0 3.2 21.0 19.3
% Upside 30% FY11E 2,198.4 29.6 4.0 2.8 17.4 14.3
JK Lakshmi Sales (Rs Crore) EPS (Rs) PE (x) EV/EBITDA (x) RoNW (%) RoCE (%)
Idirect Code JKCORP CMP 122 FY09 1,224.7 29.2 4.2 3.3 24.2 16.8
MCap 748 Target 160 FY10E 1,460.0 37.5 3.3 2.2 24.4 21.8
% Upside 31% FY11E 1,440.4 30.4 4.0 2.8 16.4 16.0
Dalmia Cements Sales (Rs Crore) EPS (Rs) PE (x) EV/EBITDA (x) RoNW (%) RoCE (%)
Idirect Code DALCEM CMP 144 FY09 1,753.0 19.6 7.3 5.7 13.1 12.0
MCap 1164 Target 147 FY10E 2,228.1 22.9 6.3 4.0 13.6 11.8
% Upside 2% FY11E 2,919.3 23.3 6.2 3.6 12.2 11.7
Orient Paper & Industries
Sales (Rs Crore) EPS (Rs) PE (x) EV/EBITDA (x) RoNW (%) RoCE (%)
Idirect Code ORIPAP CMP 44 FY09 1,503.2 12.0 3.6 3.4 41.3 43.1
MCap 896 Target 60 FY10E 1,689.5 9.0 4.8 3.6 24.3 26.0
% Upside 38% FY11E 2,143.5 11.8 3.7 2.3 25.6 32.7
ICICIdirect.com | Equity Research
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UltraTech (ULTCEM)
RATING RATIONALE
ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns
ratings to its stocks according to their notional target price vs. current market price and then categorises them
as Strong Buy, Buy, Add, Reduce and Sell. The performance horizon is two years unless specified and the
notional target price is defined as the analysts' valuation for a stock.
Strong Buy: 20% or more;
Buy: Between 10% and 20%;
Add: Up to 10%;
Reduce: Up to -10%
Sell: -10% or more;
ANALYST CERTIFICATION
ICICIdirect.com | Equity Research
Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com
ICICIdirect.com Research Desk,
ICICI Securities Limited,
7 th Floor , Akruti Centre Point,
MIDC Main Road, Marol Naka,
Andheri (East)
Mumbai – 400 093
research@icicidirect.com
We /I, Ravi Sodah PGDBM, B.COM research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal
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