icicidirect_ultratechcement_eventupdate

8/7/2019 ICICIdirect_UltraTechCement_EventUpdate

1/5

November 16, 2009

ICICIdirect.com | Equity Research

Event Update

WHATS CHANGEDPRICE TARGET ............................................................. Changed from Rs 933 to Rs 900

EPS (FY 1 0E) .................................................................................................. Unchanged

EPS (FY11 E) .................................................................................................. Unchanged

RATING....................................................................... Changed from Buy to Strong Buy

Multiple expansions to partly mitigateearnings dilution impact

News

The board of UltraTech Cement and Samruddhi Cement, a subsidiary ofGrasim Industries, has approved Samruddhis merger with UltraTech. Theexchange ratio for the merger was pegged at 4:7 (1:1.75). Samruddhishareholders will receive four shares of UltraTech at a face value of Rs 10each for every seven shares of face value Rs 5 each. Thus, according tothe 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) ismarginally negative for UltraTech and marginally positive for Grasim. Themerger is likely to be effected by July 1 2010. Prima facie the mergerration appears to be EPS decretive (-8%) for FY11 EPS.

Our view

We believe the impact on the share price will be partly mitigated byexpansion of multiples. Post restructuring the valuation multiple forUltraTech will increase due to the following factors:

The merged entity will emerge as the largest player with acapacity of 49 MT, more than double the capacity of distinctsecond 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, therebyeliminating regional risk

The move is unlikely to provide major cost savings in the near term giventhat the cement businesses of Grasim and UltraTech are alreadyoperationally integrated with common branding.

ValuationAt the CMP of Rs 730 per, the stock is trading at 8.1x and 9.5x its FY10Eand FY11E earnings, respectively. It is trading at an EV/tonne of $87 and$80 its FY10E and FY11E capacities, respectively. We are assigning aSTRONG BUY rating to the stock with a price target of Rs 900 per share.

UltraTech Cement (ULTCEM)Rs 730

ting matrix ing : Strong Buyget : Rs 900

get Period : 12-15 MONTHS

ential Upside : 23%

y Financials

FY08 FY09 FY10E FY11Et Sales 5509.2 6383.1 6959.5 7360.4ITDA 1720.1 1706.4 2061.9 1752.1t Profit 1007.6 977.0 1135.3 967.9

uation summaryFY08 FY09 FY10E FY11E

S (Rs) 80.4 77.4 90.0 76.7 (x) 9.1 9.4 8.1 9.5

rget PE (x) 11.2 11.6 10.0 11.7

V to EBITDA (x) 6.2 6.0 4.6 4.9V/Tonne(US$) 125 100 87 80ce to book (x) 3.4 2.6 2.0 1.7

NW (%) 45.2 31.0 27.5 19.0CE (%) 40.7 29.2 29.7 23.0

ck dataock datacap Rs9210.4 crorebt (FY09) Rs 2142.6 croresh & Invest(FY08) Rs 11319 crore

V Rs 10213.5 crore

week H/L Rs 886 / 250uity cap Rs 125.2 crorece value Rs 10F Holding(%) 5.9

Holding(%) 6.0 ce movement (Ultra tech vs. Nifty)

0

200

400

600

800

000

Nov-08 May-09 Nov-090

1,000

2,000

3,000

4,000

5,000

6,000

UltraTech Cement NIFTY

alysts name

avi [email protected]


2/5

UltraTech (ULTCEM)

ICICIdirect.com | Equity Research Page 2

To emerge as a pan-India player

As of now, UltraTech has a presence only in the western, eastern andsouthern region. Post restructuring, UltraTech will gain a presence in theother two regions, viz. northern and central region, thereby eliminating

the regional risk as the quantum and timing of the decline has historicallybeen different for different regions.

Exhibit 1: UltraTech pre-merger region wise capacity break up

18%

47%

35%

East West South

Source: CMA, ICICIdirect.com Research

Exhibit 2: UltraTech post-merger region wise capacity break up

25%

16%

8%26%

25%

North Central East West South

Source: CMA, ICICIdirect.com Research


3/5

UltraTech (ULTCEM)


To emerge as a global giant

The merged entity will emerge as the largest player in India with acapacity of 49 MT, more than double that of ACC and Ambuja. Themerged entity will be bigger than the entire Pakistan cement industry (44MT) put together and among the top 10 cement giants in the world. As ofnow, global cement players are trading at double the P/E multiplecommanded by UltraTech despite having lower return ratios.

Given the lower liquidity of UltraTech, ACC and Ambuja have so far beenpreferred companies with institutional investors who were looking for anexposure to the Indian cement sector. The new consolidated entity canpotentially provide investors with another pure cement play in India.Exhibit 3: Global cement giants

264 258

134116

100 9373

57 51 49 45 39 37 35 3530

60

90

120

150

180

210

240

270

300

1) Lafarge-France

2) Holcim-Swizeland

3) CNBM-China

4) Heidelberg- Germany

5) Cemex - Mexico

6)Anhui Conch - China

7)ItalCementi - Italy

8)Taheiyo-Japan

9) CRH-Ireland

1

0) AV Birla -India*

11) Buzzi Unichem - Italy

12) Eiro Cement

13

)Cimpor - Portugal

14) Jdong- China

15) Hauxin- China

Source: ICICIdirect.com Research

Valuations

Though prima facie the swap ratio appears to be EPS decretive, the fullimpact of the same is largely going to be mitigated by the expansion inthe multiple on account of reduction in the regional risk, improvement inliquidity (driven by increased free float) and increase in size. At the CMPof 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 $80its FY10E and FY11E capacities, respectively. We are assigning aSTRONG BUY rating to the stock with a price target of Rs 900 per share.


4/5

UltraTech (ULTCEM)


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 32.8MCap 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 27.7MCap 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

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 29.2MCap 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 33.9MCap 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 17.0MCap 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 17.2MCap 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 16.8MCap 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 12.0MCap 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

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 43.1MCap 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 coverage universe

UltraTech Cements

Orient Paper & Industries


5/5

UltraTech (ULTCEM)


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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;

Pankaj Pandey Head Research [email protected]

ICICIdirect.com Research Desk,ICICI Securities Limited,7 th Floor , Akruti Centre Point,MIDC Main Road, Marol Naka,Andheri (East)Mumbai 400 [email protected]

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