Ultratech Cement Event Update_120914

8/11/2019 Ultratech Cement Event Update_120914

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Financial Snapshot (Standalone) (Rsmn) YE- Net EBITDA EPS EPS RoE EV/ EV/t

Mar Sales (Core) (%) APAT (Rs) % chg (%) P/E EBITDA (USD)

FY12A 181,664 40,007 22.0 23,005 83.9 81.8 19.6 20.7 12.0 189

FY13A 200,179 45,205 22.6 26,554 96.9 15.4 18.9 17.9 10.9 180

FY14E 216,520 47,693 22.0 26,445 96.5 -0.4 16.2 18.0 10.1 140

FY15E 248,492 56,545 22.8 31,860 116.2 20.5 16.9 14.9 8.3 136

Ultratech CementStrategic fit, but earnings dilutive in near term

September 12, 2013

Rating

Accumulate

Previous Reco

Hold

CMPRs1,759

Target PriceRs1,900

EPS Chg FY14E/FY15E (%) NA

Target Price change (%) NA

Nifty 5,851

Sensex 19,782

Price Performance(%) 1M 3M 6M 12M

Absolute 4 -4 -8 0

Rel. to Nifty 0 -8 -9 -9Source: Bloomberg

Relative price chart

1400

1535

1670

1805

1940

2075

S ep -1 2 N ov -1 2 J an -1 3 M ar -1 3 M ay -1 3 J ul -1 3 S ep -1 3

Rs

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20%

Ultratech Cement (LHS) Rel to Nifty (RHS) Source: Bloomberg

Stock DetailsSector Cement

Bloomberg UTCEM IB

Equity Capital (Rs mn) 2,742

Face Value(Rs) 10

No of shares o/s (mn) 274

52 Week H/L 2,154/ 1,402

Market Cap (Rs bn/USD mn) 482/ 7,570

Daily Avg Volume (No of sh) 236,812

Daily Avg Turnover (US$mn) 6.4

Shareholding Pattern (%)Jun'13 Mar'13 Dec'12

Promoters 62.0 62.0 62.0

FII/NRI 22.7 22.6 22.2

Institutions 4.6 4.6 4.6

Private Corp 3.5 3.4 3.7

Public 7.3 7.4 7.5 Source: Bloomberg

Ajit [email protected]+91-22-66121255

n Ultratech enhances its leadership with acquisition of JPAs4.8 mtpa Gujarat Cement Unit at EV of Rs38 bn or USD124/t

n We see acquisition as fair value strategic fit for Ultratechproviding enough growth potential in a fast growing market

n Ultratech to exploit significant distribution & logisticsynergies in long term with immediate gain of ~Rs400 mn byrealignment of markets

n Near term EPS dilution of 6-8% could weigh on the stock.However we would look to ACCUMULATE the stock. Upgraderating. Valuation reasonable post recent underperformance

Strategic fit in long term, but earnings dilutive in near termUltratech Cement has announced acquisition of the 4.8 mtpa Gujarat Cement Unit

(GCU) of Jaypee Cement Corporation Limited (JCCL), the wholly owned sub ofJaiprakash Associates (JPA) at enterprise value of Rs38 bn or EV/t of USD124 which ispretty much in line with our expectation. Our preliminary calculations based on EBIDTA/tof Rs585 & Rs835 (Based immediate synergies + improvement in realisation by changein trade:non trade mix) suggest that the deal will be EPS dilutive by 6.3%-7.9% forUltratech if financed through D:E of 1:1. Ultratech management indicated that it will take3 year for the deal to be value accretive.

Strategic & Complementary asset acquisitionWe believe that acquisition of GCU is a strategic & complementary fit for Ultratech. Theasset gives enough growth potential to Ultratech (GCU Utlisation at 62%, with potentialscope of doubling the capacity) in a fast growing market, where Ultratech is alreadyrunning at 95% utilization. Hence ~5mtpa cement plant with a split grinding unit, captive

jetty & a captive power plant does mean a strategic fit for Ultratech, helping strengthenits already strong (7.6 mtpa existing capacity) presence in state of Gujarat.

Complementary market with significant synergy potentialWe see the asset providing Ultratech significant synergies in areas distribution &logistics. With GCUs coast based plants located in Kutch & Ultratech having bulkcement terminals at Mumbai, Mangalore, Cochin & Srilanka, we see potential forUltratech to enhance utilization at GCUs plant to support additional volumes throughcoastal movements to these markets. Apart from the immediate synergy gain of ~Rs400mn by rationalising distribution & realignment of markets, we see Ultratech exploitinglogistic synergies by realigning GCUs clinker movement with Ultratechs existing plants.Ultratech management has also indicated at leveraging its strong retail distributionnetwork in Gujarat that will help correct GCUs adverse Trade:Non Trade distributionpattern (GCU at 35:65 as compared to Ultratech ratio of 70:30) & also leveringUltratech brand for Right Pricing of product.

Post recent correction, Upgrade to ACCUMULATEThough near term earnings dilution would weigh on the stock performance, we see thisas inorganic but strategically important acquisition in a very promising market to helpcreate value in long run. Post the recent underperformance of the stock, valuations nowin comfort zone with EV/E at 8.5X EV/t at USD135. We upgrade the stock to

ACCUMULATE with unchanged TP of Rs1900.


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Ultratech Cement Event Update

Emkay Research September 12, 2013 2

Ultratech Cement acquires JPAs Gujarat Cement Unit at EV of Rs38 bn

In a move that will enhance Ultratech Cements leadership position in Indian Cement sector,the company has approved the acquisition of the Gujarat Cement Unit JCCL, the whollyowned sub of JPA at an enterprise value is Rs.38 bn or an EV/t of USD 124 (USD=INR-Rs64) (EV/t of USD 144 considering INR @ 55). The assets of Gujarat Cement Unit (GCU)will be acquired by way of de-merger (see exhibit below).

Exhibit 1: Deal Structure

Gujarat Cement Unit Plants

Integrated Unit (IU): Sewagram Kutch, Gujarat

Clinker Capacity - 3.6 mtpa (2x5500 TPD)

Cement Capacity - 2.4 mtpa

Grinding Unit (GU): Wanakbori (Near Ahmedabad), Gujarat

Cement Capacity - 2.4 mtpaSource: Company

Jaiprakash Associates Limited (JAL)- Parent

Jaypee Cement Corporation Ltd (JCCL)-Wholly owned subsidiary

AP Cement Unit &Other Businesses

Gujarat CementUnit


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Financial aspects of the deal

Deal EPS dilutive by 6.3%-7.9% for Ultratech Cement

Ultratech management indicated an EBIDTA/t of Rs250 for GCU as compared to EBIDTA/tof ~Rs800/t for its own cement units in Gujarat. It also has indicated Rs300-400 mn ofimmediate synergy benefits. Our preliminary calculations based on EBIDTA/t of Rs585 &Rs835 (Based immediate synergies + improvement in realisation by change in trade:nontrade mix) suggest that the deal will be EPS dilutive by 6.3%-7.9% for Ultratech if financedthrough D:E of 1:1. If financed entirely through debt the dilution would be 8.2/9.8%.

Exhibit 2: Deal EPS dilutive by 6.3%-7.9% for Ultratech Cement

Rs Mn

Gujarat Plant Capacity 4.8 4.8

EV/ton (USD/ton) 124 124

Value of Gujarat Cement Plant 38033 38033Funded Through

Existing Debt on Gujarat Cement Plants 20000 20000

Equity issue 1500 1500Total 21500 21500

Internal Accrual 16533 16533

Assumed D:E for acquisition 52.5% 52.5%

GCU Volumes FY13E (mn tons) 3.00 3.00GCU Estimated EBIDTA/t + potential synergies &pricing gains on mix change

585 835

EBIDTA 1755 2505

Depreciation 1902 1905

EBIT -147 600

Interest Cost @ 9.5% 1900 2043

EBT -2047 -1442

Less: loss of treasury income 826.7 829.64

EBT from GCU -2873 -2272

Ultratech FY13 EBT 38254 38254

EBT from GCU as % of FY13 EBIT -7.5% -5.9%

PBT post with Gujarat Plant 35381 35982

Tax 10826 11011

PAT 24554 24972

Equity share O/S (mn) 275.1 275.062

EPS (Rs) 89.3 90.8

Existing EPS (Rs) 96.9 96.9% change -7.9% -6.3%

Source: Company, Emkay Research

Management Indicates 3 years for the deal to be value accretive

Thought the plant is a recently commissioned, the utilization at the plant remains at just62%. Further apart from some energy inefficiencies (higher power consumption), largeshare of non trade sales (Trade:Non trade ratio at 35:65) means that the realisations for theplant are lower. Ultratech management in its commentary indicated that though there aresome immediate synergy benefits to an extent of Rs300-400 mn, it will take 3 year for thedeal to be value accretive. Our Estimate indicate that deal would be earnings neutral at 3.6mtpa volumes (as compared to current volumes of 3 mtpa) & EBIDTA/t of Rs1050.


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Valuation of the deal

The deal valuation is largely in line with expectation, which although we believe is slightlyon a higher side considering low profitability for the plant (Deal valued at 15-21X EV/E ascompared to Ultratechs own valuation of 8.5X EV/E). On an asset basis though, Ultratechhas acquired the asset at pretty much close to its own market valuation of EV/t of USD121& replacement cost of USD125/t. However given that the company can create synergies byway of logistic, distribution & market expansion & pricing of the product, we believe that thevaluation are justified.

Funding of the deal

Ultratech will take over all the assets and the liabilities of the Unit. The net amount ofenterprise value less liabilities taken over will be the consideration that Ultratech will pay toJCCL. Though the company in its press release has indicated initial funding through Debt &Rs1.5 bn equity issue to JCCL, we believe eventually Ultratech will retire debt worth Rs16.5bn on the plant (which are related party loan on GCU). If the deal in entirely funded throughdebt we believe it would be negative for Ultratech given higher earnings dilution

Exhibit 3: Indicative Deal FundingRsmn

Enterprise value 38000

Debt 36500

Equity Issue to JCCL 1500

Ultratech CMP 1700

Shares to be issue 0.88

Existing Equity O/S 274.2

New Equity 275.1

Equity Dilution (%) 0.32%Source: Company, Emkay Research

Exhibit 4: Gearing ratios if funded largely through debt

(X) Pre Deal Post DealD:E 0.31 0.54

Net D:E 0.03 0.27

Debt:EBIDTA 1.01 1.7Source: Company, Emkay Research


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Whats in it for Ultratech Cement

Exhibit 5: GCU Plant details

Plants

Integrated Unit (IU): Sewagram Kutch, Gujarat

Clinker Capacity - 3.6 mtpa (2x5500 TPD) Cement Capacity - 2.4 mtpa

Grinding Unit (GU): Wanakbori (Near Ahmedabad), Gujarat

Cement Capacity - 2.4 mtpaSource: Company

Infrastructure & resource with scope to double the capacity Land Area of 5479 hectares, Recent commissioned 4.8 mtpa of cement capacity. Coast based clinker capacity of

3.6 mtpa with integrated cement unit of 2.4 mtpa at Sewagram (Commissioned2009), Kutch and a 2.4 mtpa Split grinding unit at Wanakbori (Commissioned 2011)

near Ahmedabad Limestone reserves of ~ 500 mt sufficient for over 90 years at current capacity 57.5 MW Coal based Thermal Power Plant & 30 MW DG Sets Cement bag manufacturing unit with capacity of 0.3 mn/ day good enough for the

entire 5 mtpa capacity. Captive Jetty 2500 DWT barges for clinker and coal movement Desalination plant for meeting water requirement of the plant

Strategic, Complementary & Synergistic asset acquisition

a) GCU a strategic fit, easing Ultratechs stock-out situation in high growth

market: Ultratech has added ~ 21 mtpa over 8 year past year in India & is currentlyunderway to add another 10.6 mtpa across regions. But the company has added verylittle capacity in the state of Gujarat. With Gujarat turning out to be the fastest growingmarket with cement demand growth of ~11% CAGR over last 7 years, Ultratech wasfast running out of capacity in Gujarat. Even after setting up a 0.7 mtpa grinding unitnear Surat and routing the surplus clinker exports to this grinding unit, the companysutilization at 95% for Gujarat plants clearly signaled stock-out situation. Hence anewly build ~5mtpa cement plant with only 62% utilization, with a split grinding unit & acaptive power plant does mean a strategic fit for Ultratech, helping strengthen itsalready strong (7.6 mtpa existing capacity) presence in fast growing high potentialmarket.

b) GCUs Complementary location & market : JCCLs Gujarat Plants are in Kutchregion at Sewagram, (2.4 mtpa) which is the coast based North+West part of Gujarat &the split grinding unit at Wanakbori near Ahmedabad is in central part of Gujarat. Thecoast based location of the Sewagram unit helps resource movement of coal & clinker& serves the big cement markets like Mumbai, where as the Wanakbori grinding unitwith abundant supply of fly ash from Gujarat SEB helps serve Ahmedabad, the statecapital. On the other hand Ultratechs 7.6 mtpa operations are largely in theSaurashtra which is South+West part of the state. Hence the GCUs location is notonly strategic but also complementary for Ultratech Gujarat operations.

Further Ultratech has bulk cement terminal at Mumbai (1.2 mtpa), Mangalore (0.5mtpa), Cochin (0.5 mtpa with expansion to 0.9 mtpa) & Srilanka (0.6 mtpa). Also thecompany is planning to expand the capacities of its Cochin & Srilanka terminals.Hence there exist potential for Ultratech to enhance utilization of Kutch unit of GCU tosupport coastal movements to these markets.


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Exhibit 6: Strategic location & complementary markets

Source: Company

C) Synergistic fit getting everything Right

Post the deal, Ultratech will have a 12.5 mtpa operation with sizeable operation acrossmultiple plants in the state of Gujarat with grinding units closer to the consumingcenters. We see Ultratech exploiting synergies in areas of Distribution, Logistics, andMarketing etc. We have elaborated a few of them here

Distribution, Logistics, trade mix, blending & pricing

Dispatches from GCU suffer from lack of proper distribution channel as far as mix of Trade(retail): Non Trade (Institutional) is concerned. Today the difference between trade & nontrade prices is as high as Rs15-20/bag. The suffers from an unfavorable mix with Trade:Non Trade trade ratio of 35:65 as compared to Ultratech favorable ratio of 70:30. Secondly,higher volume in Non-trade segment would mean typically selling to large project typicallyusing OPC cement as prescribed by PWD. Gujarat where the higher margin PPC cementproportion is already amongst the lowest in the country, GCU's PPC: OPC mix of 15:85 isfurther hurting companys cost structure & profitability. With Ultratech having the strongdistribution network & the brand strength in the trade channel, we see Ultratech

Shifting volumes from non trade to trade, helping Right Size distribution pattern Levering Ultratech brand, helping Right Pricing of product Higher PPC/OPC mix, helping Right Blend & improve costing Rationalising distribution by realignment markets to save freight outward with

Rs300-400 mn immediate synergy gain. Realignment of clinker movement with Ultratechs existing Plants to further save on

logistics & bulk handing cost.

Near term earning dilution to weigh on Ultratech, but would ACCUMULATEon decline

Though near term earnings dilution would weigh on the stock performance, we see this asinorganic but strategically important acquisition in a very promising market to help createvalue in long run. Post the recent underperformance of the stock, valuations now in comfortzone with EV/E at 8.5X EV/t at USD135. We upgrade the stock to ACCUMULATE withunchanged TP of Rs1900. We are yet to incorporate the financials of GCU in our earningsestimate for Ultratech.


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Key Financials (Standalone)

Income Statement Y/E Mar (Rsmn) FY12A FY13A FY14E FY15E

Net Sales 181,664 200,179 216,520 248,492

Growth (%) 37.6 10.2 8.2 14.8

Expenditure 141,657 154,974 168,827 191,948Employee Cost 8,310 9,684 10,749 11,609Other Exp 27,194 30,985 34,562 37,339SG&A 0 0 0 0EBITDA 40,007 45,205 47,693 56,545

Growth (%) 57.6 13.0 5.5 18.6

EBITDA marg in (%) 22.0 22.6 22.0 22.8

Depreciation 9,026 9,454 11,531 13,255EBIT 30,981 35,752 36,162 43,290

EBIT mar gin (%) 17.1 17.9 16.7 17.4

Other Income 4,418 4,599 4,910 5,045Interest expenses 2,927 2,097 2,976 2,439

PBT 32,472 38,254 38,096 45,897Tax 9,467 11,700 11,651 14,037

Effective tax rate (%) 29.2 30.6 30.6 30.6Adjusted PAT 23,005 26,554 26,445 31,860

Growth (%) 81.8 15.4 -0.4 20.5

Net Marg in (%) 12.7 13.3 12.2 12.8

(Profit)/loss from JVs/Ass/MI 0 0 0 0Adj. PAT After JVs/Ass/MI 23,005 26,554 26,445 31,860

E/O items 1,457 0 0 0Reported PAT 24,462 26,554 26,445 31,860

PAT after MI 23,005 26,554 26,445 31,860

Growth (%) 81.8 15.4 -0.4 20.5

Balance Sheet Y/E Mar (Rsmn) FY12A FY13A FY14E FY15E

Equity share capital 2,741 2,742 2,742 2,742Reserves & surplus 125,858 149,605 172,155 199,472

Net worth 128,598 152,347 174,897 202,213Minority Interest 0 0 0 0

Secured Loans 21,405 38,958 31,940 19,905Unsecured Loans 20,104 15,146 15,146 15,146Loan Funds 41,509 54,104 47,086 35,051

Net deferred tax liability 17,378 19,059 19,059 19,059Total Liabilities 187,485 225,510 241,042 256,323

Gross Block 190,138 197,940 272,705 285,386Less: Depreciation 73,797 83,250 94,781 108,036Net block 116,342 114,690 177,924 177,350

Capital work in progress 31,637 51,456 14,330 28,710Investment 37,888 37,898 37,898 37,898

Current Assets 43,564 56,854 63,107 70,713Inventories 20,359 23,505 25,508 29,274Sundry debtors 7,660 10,172 9,491 10,893Cash & bank balance 1,882 1,557 6,488 8,926Loans & advances 13,664 21,619 21,619 21,619Other current assets 0 0 0 0Current lia & Prov 41,947 48,577 52,216 58,348

Current liabilities 33,740 37,885 41,524 47,656Provisions 8,207 10,692 10,692 10,692Net current assets 1,617 8,277 10,891 12,365

Misc. exp 2 0 0 0Total Assets 187,485 212,320 241,042 256,323

Cash Flow Y/E Mar (Rsmn) FY12A FY13A FY14E FY15E

PBT (Ex-Other income) 33,929 33,655 33,186 40,851

Depreciation 9,026 9,454 11,531 13,255Interest Provided 1,761 2,097 2,976 2,439Other Non-Cash items -2,952 1,683 0 0Chg in working cap 13 -6,985 2,318 964Tax paid -7,340 -11,700 -11,651 -14,037Operating Cashflow 34,437 28,204 38,359 43,471

Capital expenditure -31,651 -27,621 -37,639 -27,061Free Cash Flow 2,786 583 720 16,410

Other income 11,140 4,599 4,910 5,045Investments -9,047 -13,200 13,189 0Investing Cashflow -29,263 -36,221 -19,540 -22,016

Equity Capital Raised 16 1 0 0Loans Taken / (Repaid) 63 12,595 -7,018 -12,035Interest Paid -2,907 -2,097 -2,976 -2,439Dividend paid (incl tax) -1,911 -2,807 -3,894 -4,543Income from investments 0 0 0 0Others 0 0 0 0Financing Cashflow -4,740 7,692 -13,888 -19,017

Net chg in cash 434 -325 4,931 2,438

Opening cash position 1,448 1,882 1,557 6,488

Closing cash position 1,882 1,557 6,488 8,926

Key Ratios Y/E Mar FY12A FY13A FY14E FY15E

Profitability (%)

EBITDA Margin 22.0 22.6 22.0 22.8Net Margin 12.7 13.3 12.2 12.8ROCE 20.1 19.5 17.6 19.4ROE 19.6 18.9 16.2 16.9RoIC 26.7 30.1 23.8 23.8Per Share Data (Rs)

EPS 83.9 96.9 96.5 116.2CEPS 116.9 131.3 138.5 164.5

BVPS 469.2 555.6 637.9 737.5DPS 6.0 8.0 8.8 12.2Valuations (x)

PER 20.7 17.9 18.0 14.9P/CEPS 14.8 13.2 12.5 10.5P/BV 3.7 3.1 2.7 2.4EV / Sales 2.6 2.5 2.2 1.9EV / EBITDA 12.0 10.9 10.1 8.3Dividend Yield (%) 0.3 0.5 0.5 0.7Gearing Ratio (x)

Net Debt/ Equity 0.0 0.1 0.0 0.0Net Debt/EBIDTA 0.1 0.4 0.1 -0.2

Working Cap Cycle (days) -0.5 12.3 7.4 5.1


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Ultratech Cement Event Update_120914