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Scrip Code Industry CMP Recommendation* Target Time Horizon

ULTCEMEQNR Cement Rs. 2,400 Buy on dips to Rs.2189-Rs.2246 band Rs.2,477 1 quarter
*Applicable till next results are announced
UTCL recently reported its Q2FY15 results. Improvement in realization along with surge in volume led to higher-than-street-expectation results. Given below are some of
the key highlights, which we came across while reviewing the results.

Key highlights of Q2FY15 results:
UTCLs Q2FY15 reported revenues above street expectations on account of higher than expected realizations and volumes. The total volumes grew 12%YoY in Q2FY15.

Quarter Financials - Standalone:
(Rs. in Cr)
Particulars Q2FY15 Q2FY14 %Chg Q1FY15 %Chg Remarks
Net Sales 5381.8 4502.1 19.5% 5649.46 -4.7%
Revenues increased by ~19.5%YoY led by volumes (+12%YoY) (including
clinker and exports) benefitting from the capacities commissioned (3mt
grinding units) in FY14, additional volume from 4.8mtpa capacities acquired
from Jaypee group and rise in Realization (+7%YoY) owing to sharp price
hikes in the South and change in region-wise sales mix.
Other operatingincome 47.54 19.8 140.5% 42.63 11.5%
Total OperatingIncome 5429.3 4521.9 20.1% 5692.1 -4.6%
Expenditure
Increase/Decrease in stock -46.25 9.0 -616.2% -3.52 1213.9%
Raw Materials 787.42 677.5 16.2% 797.55 -1.3%
RM cost remained higher mainly on account of higher petcoke price and
increase in the royalty on limestone
Purchase of Traded Goods 94.48 70.3 34.4% 87.77 7.6%
Employees Cost 310.07 284.4 9.0% 275.84 12.4%
Power & Fuel 1144.86 956.6 19.7% 1207.6 -5.2%
Increase in petcoke prices & high cost inventories led to higher P&F cost
YoY
Freight & HandlingExpenses 1292 994.2 30.0% 1329.97 -2.9%
YoY rise owing to increase in diesel price and railway freight and higher
lead distance due to external clinker purchase at Kotputli plant.
Other Expenditure 969.72 850.4 14.0% 946.39 2.5%
Total Opex 4552.3 3842.4 18.5% 4641.6 -1.9%
EBIDTA 877.0 679.5 29.1% 1050.5 -16.5%
EBITDA increased 29.1%YoY led by improvement in sales volume and
higher realization despite higher operating cost during the quarter.
EBIDTA Margins % 16.3% 15.1% 18.6%
Other Income 74.14 37.6 97.1% 213.11 -65.2%
Interest Expenses 143.35 88.8 61.5% 100.22 43.0% Due to increase in Debt pertaining to Jaypee cement plant acquisition
Depreciation 302.36 257.3 17.5% 264.5 14.3% Deprecation was up due to addition of new capacities.
PBT 505.5 371.1 36.2% 898.9 -43.8%
RETAIL RESEARCH
Oct 22, 2014
Ultratech Cement Ltd (UTCL) Q2FY15 Result Update

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PBTM % 9.4% 8.2% 15.9%
Tax 95.42 107.0 -10.8% 273.31 -65.1% Lower tax rate due to accumulated losses of the acquired plant.
Effective Tax Rate % 18.9% 28.8% 30.4%
Net Profit 410.1 264.1 55.3% 625.6 -34.5%
PAT increased 55%YoY mainly due to higher EBITDA, other income and
lower taxes.
NPM % 7.6% 5.9% 11.1%
Equity Capital 274.39 274.2 0.1% 274.36 0.0%
EPS 14.9 9.6 55.2% 22.8 -34.5%
Total Volumes (Mn Tons) 10.65 9.5 12.1% 11.96 -11.0% Recent capacity additions led to YoY growth in dispatches
Blended Realisation (Rs./Ton) 5,053.3 4,739.1 6.6% 4723.6 7.0%
Realization improved primarily due to increase in cement prices in southern
region.
(Source: Company, HDFC sec)

Some observations on Q2FY15 results:
Cost per ton analysis:

Particulars Q2FY15 Q2FY14 %Chg Q1FY15 %Chg
Increase/Decrease in stock -43.4 9.6 NA -2.9 NA
Raw Materials 739.4 722.3 2.4% 666.8 10.9%
Purchase of Finished Goods 88.7 74.9 18.4% 73.4 20.9%
Employee Cost 291.1 303.2 -4.0% 230.6 26.2%
Power & Fuel 1075.0 1019.9 5.4% 1009.7 6.5%
Freight & HandlingExpenses 1213.1 1059.9 14.5% 1112.0 9.1%
Other Expenditure 910.5 906.6 0.4% 791.3 15.1%
Total Cost 4274.5 4096.4 4.3% 3880.9 10.1%
EBIDTA 778.9 703.3 10.7% 878.3 -11.3%
(Source: Company, HDFC sec)
Other Highlights:

UTCLs revenue increased 19.5%YoY to Rs.5381.8 cr in Q2FY15, led by 12%YoY (-11%QoQ) rise in volume to 10.65mmt, and 6.6%growth in average blended
realizations (to Rs.5053/tn). Dispatches increased due to higher demand and additional volume from the acquired unit of Gujarat (In Q1FY15, Ultratech had acquired
of Jaypees 4.8 mn tn Gujarat based cement plants (integrated unit at Sewagram & a grinding unit at Wanakbori)). However, high input cost and additional cost
relating newly acquired plant put some pressure on margins. Despite higher operating costs, EBITDA increased 29.1%YoY led by improvement in sales volume and
higher realization. The companys freight, power & fuel and purchase of finished goods grew 14.5%/5.4%/18.4%YoY to Rs1213/1075/88 per tonne during the quarter.
UTCEMs EBITDA/tonne increased from Rs.703/tn in Q2FY14 to Rs.778.9/tn in Q2FY15 due to 7%growth in blended realization/ tn (to Rs 5053/tn) offset by freight
outward expenses ,fuel and other expenses. Increase in freight expenses could be attributed to higher rail freight charges and hike in diesel prices. Also, the companys
tax rate declined to 18.9%in Q2FY15 compared to 28.8%in Q2FY14 (30.4%QoQ). Consequently, the companys net profit increased 55.3%YoY to Rs.410.1 cr led by
higher despatches (led by capacity addition) and improved cement prices.

The management has guided for 8%YoY growth, with expected double digit growth in H2FY15.

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Ultratech management indicated that the on-going capex is on track. During the quarter, Ultratech commissioned 25 MW of Thermal Power plant (at Tadipatri, AP)
and 1.4 mn tn cement mill at Rajashree Cement, Karnataka. Post this capex, overall cement installed capacity stands 60.2 mn tn; total power capacity increased to 733
MW. The captive power plants are sufficient to cater to ~80%of power requirement of the company. UTCEM increased its own grinding capacity by 4.5mt post
Q2FY14 and acquired 4.8mt capacity of JCCL in the West region.

The company has plans to further augment capacity by 6mt (3.1mt in the East region to support the clinkerization unit in Raipur and 2.9mt in Rajasthan). Post-
commissioning of these capacities, the capacity in India will increase to 66.2mt. Further, given the likelihood of higher spending on infra development coupled with a
rebound in economic growth, going forward, we expect the company to be benefitted from capacity expansion in the East and North regions and also, the entire
benefits from JCCLs acquired plants are expected to kick-in from next quarter.

It has planned a capex of Rs7.6bn towards material evacuation and logistics infrastructure and Rs41.3bn towards modernization and up-gradation of existing plants
including purchase of land. We believe that focus on modernization, up-gradation and logistics infrastructure would help operational efficiencies in future. UTCEM had
a planned capex of Rs99bn (excluding Rs38bn for JCCLs acquisition) of which it had spent Rs28.4bn till March-14. The planned capex for FY15E is Rs38bn.

During the quarter, paid-up equity share capital of the Company increased from 274357529 equity shares of Rs 10 each to 274394363 equity shares of Rs 10 each as a
result of the allotment of equity shares in terms of the scheme of arrangement between Jaypee Cement Corp and the company and their respective shareholders and
creditors and exercise of stock options under the Company's Employees Stock Option Scheme-2006.

In terms of the scheme of arrangement between Jaypee Cement Corporation (JCCL) and the company and their respective shareholders and creditors (the scheme)
27,261 additional equity shares of the company of Rs 10 each credited as fully paid-up has been allotted to the equity shareholders of JCCL in terms of the scheme as
final consideration. The financial results of the acquired Units have been combined with the Company's financial results with effect from 12/06/2014. As a result,
figures for the three months and six months ended 30/09/2014 are strictly not comparable with previous periods.

During the quarter, the Company has through its wholly owned subsidiary UltraTech Cement Middle East Investments acquired 51%equity stake in Awam Minerals
LLC, Oman (AWAM). Awam is engaged in the business of mining of Gypsum.

Concerns

Additional capacities coming on stream across the country could result in capacity utilisation rates coming down thereby adding pressure on margins.

Being a large exporter of Cement, UTCLs earnings are sensitive to export realizations and forex fluctuations.

Rise in cost of imported coal, gypsum, flyash and rupee depreciation could impact costs and profitability.

The Supreme Court by its order dated 24
th
September, 2014, has cancelled number of coal blocks allotted to various companies. These include two coal blocks viz.
Bhaskarpara and Madanpur in Chattisgarh, allotted to the company jointly with other parties. No mining activity has commenced in the blocks allotted. Cancellation of
the coal blocks allotted to the Company will not have any material impact on the operations of the Company.

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The Competition Commission of India (CCI) upheld the complaint of alleged cartelization against certain cement manufacturing companies including the Company. The
CCI has imposed a penalty of Rs.1,175.49 cr on UTCL. UTCL filed an appeal against the Order before the Competition Appellate Tribunal (COMPAT). COMPAT has
granted stay on the CCI order on condition that the Company deposits 10%of the penalty, amounting to Rs.117.55 cr. The same has been deposited by the Company.
The Company backed by a legal opinion, continues to believe that it has a good case and accordingly no provision has been made in the accounts.

Conclusion & Recommendation

UltraTech Cement is the largest player in terms of capacity (60.2 MT including Jaypee plant) with market share of ~17%in India. The company has consistently remained
ahead of its peers in terms of capacity expansion with CAGR of 23%vs. peers CAGR of 13%over the past five years. During the quarter, UltraTech included earnings
from the recently acquired Jaypee Cement Corporation Ltd from June 12, 2014. Other than that, the company has commissioned a 25 MW thermal power plant at
Andhra Pradesh and 6.5MW waste heat recovery system at Awarpur, Maharashtra. With this, the total power capacity of the company (including WHRS) stands at 733
MW, which is around 80%of the companys power requirement. Further, the company is aiming to reach its total capacity of 70 MT by FY16E, which we believe would
help it to maintain its leadership, going forward.

UTCLs Q2FY15 revenue came ahead of street expectations. Cement demand continued to remain robust in the quarter after improvement seen in Q1 which helped the
company to post higher volume. We believe that the company benefitted from sharp improvement in cement prices in the South region during Jun-14. Current
valuations factor in a potential recovery in FY15/16, benefit of which could be diluted due to initial impact of recent acquisition of Jaypee's Gujarat plant. Management
pointed out that cement demand is slated to grow around 8%, with expected double digit growth in H2FY15. The key value drivers will be renewed Government focus on
housing and infrastructure spending. However, the oversupply scenario is likely to continue for the next three years which could have a negative impact on the cement
prices. Further, the cost pressure is expected to keep the margin range-bound.

UltraTech Cement is preferred stock in the cement space due to its strong balance sheet and pan-India presence. However unconfirmed media reports indicate Ultratech
is a potential bidder for the global assets of Holcim-Lafarge, as it looks to dispose of select assets in various geographies to comply with the respective anti-competition
laws. The global ambitions may significantly add to uncertainties related to the high acquisition price and consequent leverage and exposure to multiple geographies
that may not have as promising a growth profile as its home market.

We are maintaining our estimates for FY15 & FY16 (though the topline for both the years could be underachieved). UTCL is trading at an EV/EBIDTA of 11.0x of its FY16
capacities. At the CMP of Rs.2,400 the stock is trading at 20.8x FY16E EPS of Rs.115.2.

In our Q1FY15 result update dated July 24, 2014, we had stated that investors could buy at the CMP (2,484.4) and add on dips to Rs.2189-Rs.2246 band for a target of
Rs.2,592 over the next one quarter. Post the issue of the report, the stock made a low of Rs.2375 on July 30, 2014 and a high of Rs.2795 on Sep 09, 2014.

The not so cheap valuations and prospects of an aggressive global buyout could weigh on stock performance in the near term.

We think that investors could buy the stock on dips to Rs.2189-2246 band (19.0-19.5x FY16E EPS) for a target of Rs.2,477 (21.5x FY16E EPS) over the next one quarter.



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Standalone Financials:
Particulars FY11 FY12 FY13 FY14 A FY15 (E)* FY16 (E)*
OperatingIncome 13209.9 19085.6 21156.1 21443.7 24446.0 28462.9
PBIDT 2621.5 3240.6 4839.3 4034.8 4693.6 5977.2
PBIDTM% 19.8% 17.0% 22.9% 18.8% 19.2% 21.0%
PAT 1342.4 2403.3 2677.7 2212.8 2420.2 3159.4
PATM% 10.2% 12.6% 12.7% 10.3% 9.9% 11.1%
EPS 49.0 87.7 97.7 80.7 88.2 115.2
PE (x) 51.5 28.8 25.8 31.3 28.6 21.9
* - Quick Estimates, A- Actuals (Source: Annual Report, HDFC sec Estimates)






















Analyst: Sheetal Poonawala Email ID: sheetal.poonawala@hdfcsec.com

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2496 5066 Website: www.hdfcsec.com Email: hdfcsecretailresearch@hdfcsec.com
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