RESULT UPDATE

ULTRATECH CEMENT
Moving towards better cost and capital efficiency
India Equity Research| Cement

Ultratech Q3FY17 numbers surpassed consensus and our EDELWEISS 4D RATINGS

forecasts largely due to higher-than-estimated volumes and lower costs. Absolute Rating BUY
The other positive surprise is that capital cost for new project at Dhar, Rating Relative to Sector Outperform
Madhya Pradesh (MP) is ~15-20% lower than capex reported so far by the Risk Rating Relative to Sector Medium
industry. We have raised FY17E EPS ~7% as UTCL has achieved 82% of our Sector Relative to Market Overweight
FY17E in 9mFY17. However, we have trimmed FY18E and FY19E EPS 2%
each to factor in lower other income following the new capex
announcement. Our revised TP of INR4,372 (INR4,488 earlier) implies an MARKET DATA (R: ULTC.BO, B: UTCEM IN)
CMP : INR 3,528
exit P/E of 25x and factors in value of JPA assets at replacement value.
Target Price : INR 4,372
Apart from the structural benefits that the company may enjoy following
52-week range (INR) : 4,130 / 2,680
the cost cutting drive, the operating and financial leverage will drive EPS Share in issue (mn) : 274.5
CAGR of ~30% over FY16-19E, rendering it the key large-cap pick in the M cap (INR bn/USD mn) : 968 / 14,198
Avg. Daily Vol.BSE/NSE : 323.5

Volumes and cost savings spring a positive surprise SHARE HOLDING PATTERN (%)
UTCL reported gross revenue of INR63.7bn, down 2% YoY, aided by flat volume growth Current Q2FY17 Q1FY17
and realisations, which fell 1% YoY. This is stellar considering interim fears of retail Promoters * 62.3 62.3 62.3
sales compressing 15-20% YoY post demonetisation. Another interesting take away 6.1 6.1 6.8
was that total cost/t fell QoQ despite rising pet coke prices and 17% YoY higher diesel FII's 20.6 20.6 19.6
prices. According to management, this was achieved due to lower energy consumption Others 11.0 11.0 11.3
and lesser lead distance. Moreover, the drive to prune costs will sustain and a lot more * Promoters pledged shares : NIL
(% of share in issue)
has to be achieved, as per management. Accordingly, despite weak realisations and
rising pet coke prices, a flat EBITDA/t at INR949 is commendable. Total PAT during the
PRICE PERFORMANCE (%)
quarter was INR5.6bn, up 7% YoY.
EW
Stock Nifty Construction
Implications for other cement players Material Index
Based on the management commentary, we anticipate South-based players to report 1 month 13.5 5.1 12.1
better volumes, followed by East and then North; companies in the West are expected 3 months (11.4) (3.5) (2.5)
to be amongst the worst hit by demonetisation. Savings in power & fuel and 12 months 30.0 13.1 60.3
distribution are company specific and unlikely in case of other companies.

Thanks to rising utilisation/consolidation, EPS CAGR of ~30% over FY16-19E can well
sustain till FY21E. M with revised TP of INR4,372 (INR4,488 earlier).
Financials (INR mn)
Year to March Q3FY17 Q3FY16 % Chg Q2FY17 % Chg FY16 FY17E FY18E
Total operating Income 63,722 65,024 (2.0) 61,957 2.8 273,402 271,766 307,241
Manish Saxena
EBITDA 11,135 11,151 (0.1) 11,548 (3.6) 46,161 48,654 59,958 +91 22 6620 3105
Adjusted Profit 5,634 5,280 6.7 6,011 (6.3) 21,746 25,207 32,932 manish.saxena@edelweissfin.com

Diluted EPS (INR) 20.5 19.2 6.7 21.9 (6.3) 79.2 91.8 120.0 Sharif Hadimani
Diluted P/E (x) 44.5 38.4 29.4 +91 22 6620 3111
sharif.hadimani@edelweissfin.com
EV/EBITDA (x) 21.7 20.2 15.9
ROAE (%) 11.0 11.5 13.5 January 23, 2017
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
 Cement

Financial Statements
Key Assumptions Income statement (INR mn)
Year to March FY16 FY17E FY18E FY19E Year to March FY16 FY17E FY18E FY19E
Macro Total volume (mn tonnes) 49.3 49.0 52.5 57.7
GDP(Y-o-Y %) 7.4 7.9 8.3 8.3 Income from operations 273,402 271,766 307,241 357,348
Inflation (Avg) 4.8 5.0 5.2 5.2 Materials costs 39,811 39,951 44,058 49,897
Repo rate (exit rate) 6.8 6.0 6.0 6.0 Power and fuel 42,408 40,450 48,507 55,202
USD/INR (Avg) 65.0 67.5 67.0 67.0 Freight 59,349 56,609 61,823 70,017
Sector Employee costs 13,415 14,287 15,144 16,053
All Ind Cem demand (mt) 281 276 293 323 Factory & admin expenses 72,258 71,815 77,749 86,221
Demand growth (%) 5.2 (1.8) 6.2 10.0 Total operating expenses 227,241 223,113 247,283 277,391
Ind Capac util (%) 72.4 68.0 76.2 84.6 EBITDA 46,161 48,654 59,958 79,957
Ind avg price (INR/50kg) 297.0 302.7 314.4 346.2 Depreciation 12,890 12,794 13,879 14,384
Company EBIT 33,271 35,860 46,079 65,573
EBITDA/ Tonne (INR) 937 993 1,143 1,386 Add: Other income 2,352 5,665 6,290 6,768
Inst capacity (mtpa) 65 66 66 66 Less: Interest Expense 5,053 5,516 5,324 5,133
Capacity Utilisation (%) 76 74 79 87 Profit Before Tax 30,570 36,009 47,046 67,208
Cement sales vol (mt) 49 49 52 58 Less: Provision for Tax 8,823 10,803 14,114 20,163
Cement realiztn (INR/t) 5,549 5,547 5,857 6,195 Reported Profit 21,747 25,207 32,932 47,046
RM cost per tonne 807 815 840 865 Adjusted Profit 21,747 25,207 32,932 47,046
P&F cost per tonne 860 826 925 957 Shares o /s (mn) 274 274 274 274
Freight cost per tonne 1,204 1,155 1,179 1,214 Adjusted Basic EPS 79.2 91.8 120.0 171.4
Other expenses per tonne 1,469 1,466 1,482 1,495 Diluted shares o/s (mn) 274 274 274 274
Total expenses per tonne 4,612 4,554 4,714 4,809 Adjusted Diluted EPS 79.2 91.8 120.0 171.4
Effective tax rate (%) 28.9 30.0 30.0 30.0 Adjusted Cash EPS 126.2 138.5 170.6 223.8
Debtor days 17 18 14 16 Dividend per share (DPS) 9.5 9.5 9.5 14.3
Inventory days 67 70 63 64 Dividend Payout Ratio(%) 14.0 12.1 9.3 10.0
Payable days 41 47 45 46
Common size metrics
Year to March FY16 FY17E FY18E FY19E
Operating expenses 83.1 82.1 80.5 77.6
Materials costs 14.6 14.7 14.3 14.0
Power and fuel 15.5 14.9 15.8 15.4
Freight 21.7 20.8 20.1 19.6
Depreciation 4.7 4.7 4.5 4.0
Interest Expense 1.8 2.0 1.7 1.4
EBITDA margins 16.9 17.9 19.5 22.4
Net Profit margins 8.0 9.3 10.7 13.2

Growth ratios (%)

Year to March FY16 FY17E FY18E FY19E
Revenues 5.2 (0.6) 13.1 16.3
EBITDA 10.0 5.4 23.2 33.4
PBT 5.9 17.8 30.6 42.9
Adjusted Profit 7.9 15.9 30.6 42.9
EPS 7.9 15.9 30.6 42.9

8 Edelweiss Securities Limited

 UltraTech Cement
Balance sheet (INR mn) Cash flow metrics
As on 31st March FY16 FY17E FY18E FY19E Year to March FY16 FY17E FY18E FY19E
Share capital 2,744 2,745 2,745 2,745 Operating cash flow 43,306 38,009 52,937 44,078
Reserves & Surplus 204,617 226,772 256,654 299,006 Investing cash flow (17,323) (13,302) (25,400) (26,050)
Shareholders' funds 207,361 229,517 259,398 301,751 Financing cash flow (5,822) (3,050) (3,051) (4,693)
Short term borrowings 51,698 51,698 51,698 51,698 Net cash Flow 20,161 21,657 24,486 13,334
Long term borrowings 24,988 24,988 24,988 24,988 Capex (20,359) (11,500) (25,400) (26,050)
Total Borrowings 76,687 76,687 76,687 76,687 Dividend paid (2,926) (3,051) (3,051) (4,693)
Def. Tax Liability (net) 32,274 32,274 32,274 32,274
Sources of funds 316,321 338,477 368,358 410,711 Profitability and efficiency ratios
Gross Block 342,871 367,871 387,871 395,371 Year to March FY16 FY17E FY18E FY19E
Net Block 224,347 238,355 244,476 237,592 ROAE (%) 11.0 11.5 13.5 16.8
Capital work in progress 18,118 4,618 10,018 28,568 ROACE (%) 13.0 14.1 16.3 20.2
Intangible Assets 980 980 980 980 Inventory Days 67 70 63 64
Total Fixed Assets 243,445 243,953 255,474 267,140 Debtors Days 17 18 14 16
Non current investments 30,805 30,805 30,805 30,805 Payable Days 41 47 45 46
Cash and Equivalents 42,628 64,285 88,771 102,105 Cash Conversion Cycle 43 41 31 35
Inventories 24,261 28,583 24,331 37,212 Current Ratio 1.7 2.0 2.3 2.6
Sundry Debtors 14,149 13,028 10,869 20,895 Gross Debt/EBITDA 1.7 1.6 1.3 1.0
Loans & Advances 22,943 22,943 22,943 22,943 Gross Debt/Equity 0.4 0.3 0.3 0.3
Other Current Assets 291 291 291 291 Adjusted Debt/Equity 0.4 0.3 0.3 0.3
Current Assets (ex cash) 61,643 64,843 58,433 81,341 Interest Coverage Ratio 6.6 6.5 8.7 12.8
Trade payable 16,136 19,345 19,060 24,616
Other Current Liab 46,064 46,064 46,064 46,064 Operating ratios
Total Current Liab 62,200 65,409 65,124 70,680 Year to March FY16 FY17E FY18E FY19E
Net Curr Assets-ex cash (557) (565) (6,691) 10,661 Total Asset Turnover 0.9 0.8 0.9 0.9
Uses of funds 316,321 338,477 368,358 410,711 Fixed Asset Turnover 1.3 1.2 1.3 1.5
BVPS (INR) 755.6 836.2 945.1 1,099.4 Equity Turnover 1.4 1.2 1.3 1.3

Free cash flow (INR mn) Valuation parameters

Year to March FY16 FY17E FY18E FY19E Year to March FY16 FY17E FY18E FY19E
Reported Profit 21,747 25,207 32,932 47,046 Adj. Diluted EPS (INR) 79.2 91.8 120.0 171.4
Add: Depreciation 12,890 12,794 13,879 14,384 Y-o-Y growth (%) 7.9 15.9 30.6 42.9
Interest (Net of Tax) 3,595 3,861 3,727 3,593 Adjusted Cash EPS (INR) 126.2 138.5 170.6 223.8
Others (121) (3,861) (3,727) (3,593) Diluted P/E (x) 44.5 38.4 29.4 20.6
Less: Changes in WC (5,195) (9) (6,126) 17,352 P/B (x) 4.7 4.2 3.7 3.2
Operating cash flow 43,306 38,009 52,937 44,078 EV/tonne (USD/tonne) 235 214 211 208
Less: Capex 20,359 11,500 25,400 26,050 EV / Sales (x) 3.7 3.6 3.1 2.6
Free Cash Flow 22,947 26,509 27,537 18,028 EV / EBITDA (x) 21.7 20.2 15.9 11.8
EV/EBITDA (x)+1 yr fwd. 20.6 16.4 12.0 -
Dividend Yield (%) 0.3 0.3 0.3 0.4

Peer comparison valuation

Market cap Diluted P/E (X) EV / EBITDA (X) EV / Sales (X)
Name (USD mn) FY17E FY18E FY17E FY18E FY17E FY18E
UltraTech Cement 14,198 38.4 29.4 20.2 15.9 3.6 3.1
ACC 3,674 52.3 41.5 19.1 15.7 2.3 2.0
Ambuja Cement Ltd 6,407 43.8 46.3 27.1 22.3 4.2 3.7
Shree Cements 7,749 34.9 28.3 22.9 17.4 5.8 4.5
Median - 41.1 35.5 21.5 16.7 3.9 3.4
AVERAGE - 42.3 36.4 22.3 17.8 4.0 3.3
Source: Edelweiss research

9 Edelweiss Securities Limited