Ultratech Cement ULTC.NS UTCEM IN EQUITY: CONSTRUCTION MATERIALS 2QFY16: slight disappointment on costs Expect better 2H; benefits of new capacity, lower input cost, & operational efficiency kick in Slight miss in operating profits due to higher costs; remain positive on stock over the medium to long term Global Markets Research 20 October 2015 Rating Remains Buy Target Price Increased from 3416 INR 3427 Closing price 19 October 2015 INR 2899 Potential upside +18.2% Anchor themes As demand improves and capacity utilisation bottoms, industry margins should improve, albeit likely remaining below mid- cycle levels over FY15-17F. We believe stocks should be valued at above mid-cycle levels as the earnings growth trajectory beyond FY17F looks strong given the industry's growing pricing power. Nomura vs consensus Our TP is ~2% ahead of consensus. Research analysts India Construction Materials Vineet Verma - NFASL [email protected]+91 22 4037 4487 Saion Mukherjee - NFASL [email protected]+91 22 4037 4184 UTCEM’s 2Q EBITDA/tonne at INR 838 missed our est by ~5.0% on the back of higher operating costs but was partially offset by slightly better realisations. On the cost front, adjusting for the one-time impact of DMF, the sequential increase in power & fuel costs (despite softening of coal/pet coke/diesel prices) was a bit disappointing. Other key costs were broadly in line with our estimates. As volumes (+5.0%y-y) met our estimates, EBITDA at INR10.3bn was ~5.0% lower than our expectations but in line with the Street. Importantly, on acquisition of the Jaypee MP plant, management believes that the government will likely take up the new mining law (restrict transfer of limestone mining assets) for amendment during the winter session of Parliament. Assuming this gets approved in the winter session, the acquisition will get pushed to around the middle of next year (earlier acquisition was expected to complete by end-Dec15). To capture this, we have cut our volume estimates by 2%/5% for FY16F/FY17F. Since this acquisition was not value accretive in the first year, this doesn’t negatively impact our TP. Overall, we remain positive on UTCEM (TP of INR 3,427) as our latest reading of the annual report suggests that the company’s focus remains on delivering superior growth. It continues to invest aggressively in land to support future organic expansion along with developing new distribution channels and achieve higher cost efficiencies. In the sector, we remain more positive on demand growth in non-south regions (suggests our bottom-up analysis of Infra projects to be executed over next 3-4 years), due to which we also like ACEM (TP of INR 253/share) and SRCM (TP of INR 12,264/share). Catalysts: Clarity on new mining law from Govt; better cement demand Valuation: New TP of INR3,427; trading at ~11.5x FY17F EBITDA As we tweaked our FY16F/FY17F estimates, our TP marginally edges up to INR3,427 from INR3,416. Year-end 31 Mar FY15 FY16F FY17F FY18F Currency (INR) Actual Old New Old New Old New Revenue (mn) 229,362 261,834 254,334 319,252 302,896 368,466 359,423 Reported net profit (mn) 20,144 26,280 26,042 42,919 41,074 56,803 53,023 Normalised net profit (mn) 20,144 26,280 26,042 42,919 41,074 56,803 53,023 FD normalised EPS 73.49 95.87 95.01 156.58 149.84 207.22 193.44 FD norm. EPS growth (%) -6.1 30.5 29.3 63.3 57.7 32.3 29.1 FD normalised P/E (x) 39.4 N/A 30.5 N/A 19.3 N/A 15.0 EV/EBITDA (x) 19.6 N/A 15.7 N/A 11.4 N/A 8.8 Price/book (x) 4.2 N/A 3.8 N/A 3.2 N/A 2.7 Dividend yield (%) 0.3 N/A 0.3 N/A 0.3 N/A 0.3 ROE (%) 10.1 11.3 11.3 15.4 14.9 20.4 19.3 Net debt/equity (%) 14.4 37.3 12.4 17.1 22.7 net cash 3.9 Source: Company data, Nomura estimates Key company data: See next page for company data and detailed price/index chart. See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Transcript
Ultratech Cement ULTC.NS UTCEM IN
EQUITY: CONSTRUCTION MATERIALS
2QFY16: slight disappointment on costs
Expect better 2H; benefits of new capacity, lower input cost, & operational efficiency kick in Slight miss in operating profits due to higher costs; remain positive on stock over the medium to long term
Global Markets Research 20 October 2015
Rating Remains BuyTarget Price Increased from 3416 INR 3427
Closing price 19 October 2015 INR 2899
Potential upside +18.2%
Anchor themesAs demand improves and capacity utilisation bottoms, industry margins should improve, albeit likely remaining below mid-cycle levels over FY15-17F. We believe stocks should be valued at above mid-cycle levels as the earnings growth trajectory beyond FY17F looks strong giventhe industry's growing pricing power.
Nomura vs consensusOur TP is ~2% ahead of consensus.
UTCEM’s 2Q EBITDA/tonne at INR 838 missed our est by ~5.0% on the back of higher operating costs but was partially offset by slightly better realisations. On the cost front, adjusting for the one-time impact of DMF, the sequential increase in power & fuel costs (despite softening of coal/pet coke/diesel prices) was a bit disappointing. Other key costs were broadly in line with our estimates. As volumes (+5.0%y-y) met our estimates, EBITDA at INR10.3bn was ~5.0% lower than our expectations but in line with the Street. Importantly, on acquisition of the Jaypee MP plant, management believes that the government will likely take up the new mining law (restrict transfer of limestone mining assets) for amendment during the winter session of Parliament. Assuming this gets approved in the winter session, the acquisition will get pushed to around the middle of next year (earlier acquisition was expected to complete by end-Dec15). To capture this, we have cut our volume estimates by 2%/5% for FY16F/FY17F. Since this acquisition was not value accretive in the first year, this doesn’t negatively impact our TP. Overall, we remain positive on UTCEM (TP of INR 3,427) as our latest reading of the annual report suggests that the company’s focus remains on delivering superior growth. It continues to invest aggressively in land to support future organic expansion along with developing new distribution channels and achieve higher cost efficiencies. In the sector, we remain more positive on demand growth in non-south regions (suggests our bottom-up analysis of Infra projects to be executed over next 3-4 years), due to which we also like ACEM (TP of INR 253/share) and SRCM (TP of INR 12,264/share).
Catalysts: Clarity on new mining law from Govt; better cement demand
Valuation: New TP of INR3,427; trading at ~11.5x FY17F EBITDA As we tweaked our FY16F/FY17F estimates, our TP marginally edges up to INR3,427 from INR3,416.
Revenue at INR 56.2bn was slightly ahead of our and Street’s estimates. As volume met our estimates, the benefit of marginally better realisation was more than offset by higher costs. Due to this, core EBITDA at INR 9.85bn was nearly 5% lower than our estimates but was broadly in line with Street’s estimates. Despite the miss in operating profits, PAT broadly met our estimates due to lower interest partially offset by higher tax rate.
Fig. 1: Actual vs Nomura vs Consensus INR m
Source: Bloomberg consensus estimates, company data, Nomura research,
Volume and realisations • Grey cement volume grew ~5% y-y in 2Q, in line with our expectations. Volumes for
white cement and wall care putty grew at a slightly higher rate of +6% y-y.
• Blended realisation at ~INR 5,032 per tonne was slightly higher than our expectation of INR 4,958.
Profitability • Led by slightly better realisations but higher costs, blended EBITDA per tonne in 2Q
came in at INR838 (up 7.6% y-y), below our expectations of INR882.
• As volume met estimates, absolute core EBITDA at INR9.3bn in 2Q came in ~5% below of our estimates. This was broadly in line with Street estimates.
• Below the EBITDA level, weak operating performance was partly offset by higher other income / lower interest. PAT at INR3.9bn (vs our est of INR 4.06bn) declined 4% q-q.
Costs • Overall costs per tonne (blended) at INR4,194) declined ~2% y-y vs our expectation of
a decline of 4.5% q-q. The key reason for lower decline was power & fuel costs.
• Raw material cost per tonne at INR 808 was higher than our estimate of INR 755. The provision related to DMF (District Mineral Foundation) amounting to INR 300mn (for the previous two quarters) seems to have affected the raw material cost.
• The sequential increase in power and fuel cost per tonne to INR 947 (vs our expectations of INR 883) albeit softening in pet coke/coal prices was a negative surprise in the results. Management noted that since 2Q is an annual shutdown period, there was no benefit over 1Q.
• Freight cost per tonne at INR1,204 was broadly in line with our estimate of INR1,212. The benefit of lower diesel costs was seen during the quarter as freight costs declined 4% q-q and -1%y-y.
• On the fixed cost front, other operating expenses at INR10.4bn were broadly in line with our estimates (+7.0%y-y).
• Employee costs at INR3.4bn (vs Nomura expectations of ~INR3.41bn) grew +7% y-y, which was in line with our expectation of a 6% y-y increase.
Sep-14 Jun-15 Sep-15Sep15F
(NOMURA) Consensus (y-y)% (q-q)%Actual vs
Consensus
Net sales 53,818 60,382 56,209 55,378 55,441 4% -7% 1%
Volumes / pricing • Industry volumes in 2QFY16 grew ~1% y-y. The growth looks lower partly due to high
base). Management is hopeful that demand will see better traction in 2H as government efforts start to yield results.
• Region wise, East continued to exhibit strong growth (Industry volume grew 8.0% y-y, UTCEM +10.0% y-y) led by strong demand from both housing and Infra.
• In West, Industry volume grew 3.0% y-y (UTCEM at +5.0% y-y). The weak housing mkt and lower monsoons impacted volumes. Within the western region, demand was particularly weak in Maharashtra.
• In North, volumes were affected by the ban on sand mining in MP due to which volume declined y-y in the state. Overall volumes for Industry grew +1%y-y vs UTCEM at +5%y-y). Management noted that there are some green shoots visible in North due to pick up in demand from road construction.
• South continued to see decline in volumes (Industry -4.0%y-y vs UTCEM +1.3% y-y). Management appeared quite positive on a pickup in demand from AP/Telangana. We remain cautious on the south and continue to believe that volume growth will be lower there compared to other regions over the next 1-2 years.
Capex • No change in capex guidance for FY16. The company will spend INR35bn for ongoing
bulk terminal, grinding units, WHR and modernisation programme.
• Management expects acquisition of the Jaypee MP plants (totaling ~5.0mnT) will get delayed as new mining law restricts transfer of limestone mines.
• The grinding units under construction in Bihar & Maharashtra (totaling around 3.2mnt) will get commissioned in the next 6-9 months.
Costs
• During the quarter, Petcoke consumption in kiln was 65% (vs 68% in previous quarter and 50% in 2QFY15).
• During the quarter, it commissioned a WHRP of 5MW; taking WHRP capacity to 53 MW. This will further increase to 58MW by end-FY16. Post commissioning of 58MW, this will allow the company to meet approx ~5.0% of its power requirement.
• Freight costs: Commissioning of grinding units (2 units in East, 1 in North and 1 in West) over FY16F/FY17F will help will reduce lead distance.
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Fig. 4: Region-wise and segment-wise assessment of demand (as per company)
Source: Company data, Nomura research
Nomura | Ultratech Cement 20 October 2015
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Key performance charts
Fig. 5: Volume grew 5%y-y, better than Industry +1.0%y-y In mnT
Source: Company data, Nomura research
Fig. 6: 1H volume grew by ~4.5%y-y In mnT
Source: Company data, Nomura research
Fig. 7: Realisation per tonne improved sequentially led by increase in prices in North / Central region INR per tonne
Source: Company data, Nomura research
Fig. 8: For 1H, blended realisation per tonne was up ~1.3%y-yINR per tonne
Source: Company data, Nomura research
Fig. 9: Costs declined ~2.0%y-y led by decline in power & fuel and freight costs INR per tonne
Source: Company data, Nomura research
Fig. 10: In 1H- costs has remained quite flattish – benefit from lower power & fuel and freight costs INR per tonne
Source: Company data, Nomura research
9.1 9.1
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Fig. 11: EBITDA per tonne growth led by both decline in costs and slightly higher realisation on a y-y basis INR per tonne
Source: Company data, Nomura research
Fig. 12: 1H − as cost has remained quite flattish, EBITDA per tonne grew ~5.0% y-y INR per tonne
Source: Company data, Nomura research
Fig. 13: No benefit in power & fuel costs was seen in 2Q albeit decline in coal/diesel prices INR per tonne
Source: Company data, Nomura research
Fig. 14: Power & fuel costs down 12%y-y led by higher pet coke usage and decline in coal/pet coke prices INR per tonne
Source: Company data, Nomura research
Fig. 15: Freight costs declined q-q led by fall in diesel prices/ non-applicability of busy season surcharge on rail freight INR per tonne
Source: Company data, Nomura research
Fig. 16: Limited benefit of fall in diesel prices has translated into higher freight costs during 1H INR per tonne
Source: Company data, Nomura research
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1,055 1,057
984 1,030 1,040
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1,035 1,090
1,172 1,160
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FY12 FY13 FY14 FY15 1HFY15 1HFY16
Freight cost /ton
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Fig. 17: In 2Q, provision for DMF levy (for previous 2 qtrs) resulted in higher costs INR per tonne
Source: Company data, Nomura research
Fig. 18: Costs up y-y on account of increases in royalty and DMF levy INR per tonne
Source: Company data, Nomura research
Fig. 19: Lower growth in employee cost in 2Q vs the last 12m run rate (y-y)% growth in employee cost
Source: Company data, Nomura research
Fig. 20: Even other operating expenses remain under check INR per tonne
Source: Company data, Nomura research
Adjust FY16F/FY17F volume estimates as we build in delay in acquisition of the Jaypee MP Plant.
Management believes that the government will likely take up the new mining law (restrict transfer of limestone mining assets) for amendment during the winter session of Parliament. Assuming this gets approved in the winter session, the acquisition will get pushed back to round the middle of next year (earlier acquisition was expected to be completed by end-Dec15). To capture this, we have cut our volume estimates by 2%/5% for FY16F/FY17F. Separately, we have tweaked our volume and realisation estimates to capture the current trend. On back of these changes, our FY16F/FY17F core EBITDA estimate has seen a cut of 2%/6% primarily to reflect changes in volume estimates. Below the EBITDA level, as the acquisition of the Jaypee MP Plant has moved to next year there is reduction in interest outgo but there is an increase in tax rate for FY16F/FY17F (based on management guidance of 30% in FY16F and 27% in FY17F).
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Nomura tech Cement 20 October 2015 | Ultra
10
Fig. 21: Change in estimates
Source: Nomura estimates
Valuation: New TP of INR 3,427 per share (vs INR3,416 earlier)
As the Jaypee MP Plant acquisition was not value accretive in the first year, cut in volume estimates for FY16F/FY17F doesn’t negatively impact our TP. Our TP marginally edges up to INR3,427 from INR3,216 as we have tweaked our estimates. We continue to value UltraTech on 12.5x EV/EBITDA, which is at a ~25%/10% premium to our target multiples for ACC and ACEM (both Neutral), respectively. We note that in a scenario, where the government doesn’t amend the new mining law (i.e. transfer of limestone mine is not permitted) than in that case inorganic acquisition will become quite tough in the sector. This can likely have a negative impact on the long-term valuation multiple of UltraTech as it has been increasing its capacity base via inorganic acquisitions.
Fig. 22: Valuation
Source: Nomura estimates
Risks
Risks to downside: 1) Higher-than-expected industry capacity additions; 2) a sharp increase in oil prices; 3) low returns on the capital investments to be made in the next two years.
FY16F FY17F
Old New Old New
Volume 49.8 48.8 56.9 54.3
Realisation (blended) per tonne 4,995 4,939 5,370 5,297
Valuation MethodologyStandalone cement business FY17F
Target EV/EBITDA 12.5 EBITDA (FY17E) 74,446 Target EV [A] 930,571
Net Debt (FY16E) [B] 26,195 Investments in subsidiaries & JVs @ book value [C] 3,508
Equity value (A-B+C) 907,884 No of shares 274 Fair value (end-Mar16) 3,311 1 yr fwd PT 3,427
Nomura | Ultratech Cement 20 October 2015
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Appendix A-1
Analyst Certification
I, Vineet Verma, hereby certify (1) that the views expressed in this Research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of my compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.
Issuer Specific Regulatory Disclosures The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries, and may refer to one or more Nomura Group companies.
Materially mentioned issuers Issuer Ticker Price Price date Stock rating Sector rating Disclosures Ambuja Cements ACEM IN INR 210 19-Oct-2015 Buy N/A Shree Cement SRCM IN INR 12311 19-Oct-2015 Buy N/A Ultratech Cement UTCEM IN INR 2898 19-Oct-2015 Buy N/A
Ultratech Cement (UTCEM IN) INR 2898 (19-Oct-2015) Rating and target price chart (three year history)
For explanation of ratings refer to the stock rating keys located after chart(s)
Valuation Methodology We value UTCEM at 12.5x EV/EBITDA, which is at a ~25%/10% premium to our target multiples for ACC/ACEM. Based on 12.5x FY17E EV/EBITDA, we arrive at a fair value of INR3,311/share, which we roll forward to June-16 to arrive at our one-year forward TP of INR3,427. The benchmark index for this stock is the MSCI India. Risks that may impede the achievement of the target price Downside risks: 1) higher-than-expected industry capacity additions; 2) sharp increase in oil prices and 3)weaker-than-expected volume/realisation growth.
Nomura | Ultratech Cement 20 October 2015
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Ambuja Cements (ACEM IN) INR 210 (19-Oct-2015) Rating and target price chart (three year history)
For explanation of ratings refer to the stock rating keys located after chart(s)
Valuation Methodology We value ACEM using our SOTP methodology, with standalone ACEM valued at one-year forward EV/EBITDA of 11.5x (lower than +1 SD). To this, we add the value of ACC’s stake, assuming a holding company discount of 20%. We arrive at our target price of INR253/share as of end-Sep 2016. The benchmark index for this stock is the MSCI India. Risks that may impede the achievement of the target price Upside risks: 1) higher-than-expected volume and realisation growth; 2) a fall in coal and diesel prices; and 3) earlier-than-expected synergy benefits from the ACC-Ambuja deal. Downside risks: 1) further increase in technical fees by Holcim; 2) a sharp increase in oil prices; and 3) lower-than-expected demand.
Shree Cement (SRCM IN) INR 12311 (19-Oct-2015) Rating and target price chart (three year history)
Buy (Sector rating: N/A)
Date Rating Target price Closing price 03-Feb-15 Buy 10,848.30 03-Feb-15 12,264.00 10,848.30 16-Sep-13 Not Rated 3,923.60 05-Nov-12 Suspended 4,325.35
For explanation of ratings refer to the stock rating keys located after chart(s)
Valuation Methodology We value the cement business at 13.0x FY17F EBITDA and separately its power business at 6.0x EV/EBITDA (which is at a discount to other pure-play power generating companies). We adjust this targeted EV with net debt and roll back by three months to arrive at our 1 yr fwd TP of INR12,264. The benchmark index for this stock is the MSCI India. Risks that may impede the achievement of the target price Downside risks include: (1) Due to higher concentration of its capacity in the north of India, any potential slowdown of infrastructure sector/ construction activity in the northern region could result in lower sales volume growth /realisation; (2) delays in capacity additions, and (3) a sharp increase in oil prices.
Important Disclosures
Nomura | Ultratech Cement 20 October 2015
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Benchmarks are as follows: United States/Europe/Asia ex-Japan: please see valuation methodologies for explanations of relevant benchmarks for stocks, which can be accessed at: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology; Japan: Russell/Nomura Large Cap. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. Sectors that are labelled as 'Not rated' or shown as 'N/A' are not assigned ratings. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia. Japan/Asia ex-Japan: Sector ratings are not assigned. Explanation of Nomura's equity research rating system in Japan and Asia ex-Japan prior to 21 October 2013 STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price, subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock, based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy' recommendation indicates that potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%. A 'Reduce' recommendation indicates that potential downside is 5% or more. A rating of 'Suspended' indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity identified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation.
Target Price A Target Price, if discussed, reflects in part the analyst's estimates for the company's earnings. The achievement of any target price may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the company's earnings differ from estimates. Disclaimers This document contains material that has been prepared by the Nomura entity identified on page 1 and/or with the sole or joint contributions of one or more Nomura entities whose employees and their respective affiliations are also specified on page 1 or identified elsewhere in the document. The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries and may refer to one or more Nomura Group companies including: Nomura Securities Co., Ltd. ('NSC') Tokyo, Japan; Nomura International plc ('NIplc'), UK; Nomura Securities International, Inc. ('NSI'), New York, US; Nomura International (Hong Kong) Ltd. 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