Start of earnings upgrade
ACCUMULATE
CMP: Rs380 Target Price: Rs435
Ultratech Cement Ltd (UTCL) Q3FY2009 net profit at Rs2.38bn is above our estimates (Rs2.2 bn) thanks to higher than expected cement realisations. Net revenues increased by 18% yoy to Rs14.17bn fueled by 6% volumes growth (4.6 million tonnes) and a 12% yoy improvement in cement realizations (Rs3568/ton). EBIDTA for the quarter though declined by 7.7% yoy to Rs4.5 bn, the same was better than expected. The operating performance is commendable, considering that during the quarter UTCL reported highest ever power & fuel cost of Rs1154/ ton reported during Q3FY2009 – up 54% and 17% yoy and qoq respectively. Management commentary on results highlights that UTCL could not benefit from 40% drop in international coal prices during the Q3FY2009 as the company was carrying high cost inventory and improving coal at high price contracts entered in earlier quarters. However this also points out to the fact UTCL now has exhausted all its high cost coal inventory and Q4FY2009 would see its coal cost getting aligned to market prices. We believe that worst is behind for the company and see significant improvement in operating performance in Q4FY2009. Management also has shared similar view in its outlook.
We acknowledge that the outlook on macros for cement sector has not improved as compared to Q2FY2009. However we opine that business fundamentals, driven by sharp drop in coal, pet coke and HDPE prices have improved considerably. We believe the impending oversupply of cement on back of capacity addition and the resultant weakening of pricing power of cement producers is already factored in valuation of cement stocks. But what is not factored in is the possible upgrade in FY2010 earnings given sharp moderations in cost. We see upgrade our FY2009 earnings estimates for UTCL by 2.5% and for FY2010E by 12.5%. Our EPS estimates now stand at Rs75.4 for FY2009 and Rs68.4 for FY2010. We upgrade our rating on the stock from HOLD to ACCUMULATE - price target Rs435.
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