COMPANY UPDATE

ULTRATECH CEMENT
Another lucrative acquisition
India Equity Research| Cement
COMPANYNAME
UltraTech Cement’s (UTCL) proposal to acquire 13.4mtpa cement assets EDELWEISS 4D RATINGS
from Century Textiles (CTIL), we believe, will delight investors given: Absolute Rating BUY
1) lucrative valuation of USD96/t (USD106/t adjusted to 2mtpa split Rating Relative to Sector Outperform
grinding unit) broadly at par with current replacement cost; 2) the Risk Rating Relative to Sector Medium
acquisition will fortify UTCL’s leadership position & catapult market share Sector Relative to Market Underweight
from 21% to 24%; 3) acquisition will be EPS neutral from day one with low
hanging levers to enhance current profitability; and 4) no major stress on
MARKET DATA (R: ULTC.BO, B: UTCEM IN)
balance sheet. UTCL’s endeavour to bolster its market share via CMP : INR 3,852
acquisitions amidst organic expansions, both at optimal cost, is heartening. Target Price : INR 4,779
While the deal is subject to regulatory clearances and CCI’s approval, 52-week range (INR) : 4,600 / 3,773
management’s confidence of completing it over the next six-nine months is Share in issue (mn) : 274.6
comforting. Rough cut analysis indicates no major changes in our FY20 EPS M cap (INR bn/USD mn) : 1,058 / 15,537
and TP. With a positive view on the cement sector citing rising clinker Avg. Daily Vol.BSE/NSE(‘000) : 228.6
utilisations and numero uno UTCL being an obvious beneficiary, we
maintain ‘BUY’ with TP of INR4,779. SHARE HOLDING PATTERN (%)
Current Q3FY18 Q2FY18
Lucrative deal: Fortifying domestic position Promoters * 62.0 62.0 62.1
UTCL has agreed to buy 13.4mtpa cement assets from CTIL by issuing ~14mn equity MF's, FI's & BK’s 5.7 5.7 5.6
shares (swap ratio CTIL: UTCL being 8:1) and assuming INR30bn debt. The EV/t works FII's 22.2 22.2 22.1

out to a lucrative USD96 and adjusted to the 2mtpa split grinding unit, to USD106— Others 10.1 10.1 10.1
* Promoters pledged shares : NIL
broadly at par with the replacement cost. The acquisition will catapult UTCL’s market (% of share in issue)
share from 21% to 24% i.e., ~3x of the second-largest company in India.
PRICE PERFORMANCE (%)
EPS neutral on day one; scope to improve EW
Despite ~5% equity dilution and increase in debt, the sub-optimal EBITDA/t of ~INR500 Stock Nifty Construction
Material Index
(in FY18) renders current EPS largely neutral. Low hanging levers to enhance margins—
potential to bridge ~INR500/t realisation gap, fixed cost rationalisation, option of 1 month (3.3) 0.7 (0.9)
3 months (7.4) 1.4 (3.6)
installing >20MW waste heat recovery power plants—will cheer investors further.
12 months (11.1) 12.4 9.6

Outlook and valuations: March continues; retain ‘BUY’

UTCL has been on a dream run having increased capacity at 14% CAGR over FY14-19E
versus industry’s growth of ~5-6%. We believe, the company will be the largest
beneficiary of the imminent rise in industry’s clinker utilisation (refer, Clinker: Catch
the upcycle) and maintain ‘BUY/ SO’ with TP of INR4,779 (14x FY20E EV/EBITDA).
Financials (INR mn)
Year to March FY17 FY18E FY19E FY20E
Revenues 238,914 297,900 368,050 427,722 Navin R. Sahadeo
+91 22 4088 6242
EBITDA 49,690 58,832 73,739 100,373 navinr.sahadeo@edelweissfin.com
Adjusted Profit 26,372 24,205 32,078 51,015
Sharif Hadimani
Diluted P/E (x) 40.1 43.7 33.0 20.7 +91 22 6620 3111
EV/EBITDA (x) 21.0 20.3 15.9 11.3 sharif.hadimani@edelweissfin.com
ROAE (%) 11.6 9.7 11.8 16.4
May 21, 2018
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Cement

Conference call: Key takeaways

 UTCL will acquire 13.4mtpa cement assets which will be demerged from CTIL. These
consist of three integrated units: 1) Maihar, Madhya Pradesh (4.2mtpa cement and
2.8mtpa clinker); 2) Manikgarh, Maharashtra (4.8mtpa cement and 4.1mtpa clinker);
and 3) Baikunth, Chhattisgarh (2.4mtpa cement and 1.7mtpa clinker). It also has a
grinding unit at Sonar Bangla, West Bengal, of 2mtpa capacity.
 The deal excludes the 1.2mtpa cement plant due to lack of statutory clearances.
 Total enterprise value of assets is ~INR86.2bn (USD96/t), valuing integrated units
(11.4mtpa capacity) at USD 106/t and grinding unit (2mtpa) at USD40/t.
 Operating at ~75% capacity utilisation, CTIL’s assets generated EBITDA/t of ~INR500 in
FY18, adjusted to one-time gains. EBITDA margin stood at 12.5% versus ~20% for UTCL.
 UTCL will invest ~INR5bn over the next three years (post acquisition) to improve
efficiency of CTIL’s assets. This includes INR1.5bn towards land acquisition for Kesla
mines in Chhattisgarh and INR3.5bn towards modernisation cost.
 Target assets do not have WHRS facilities at any of the locations. Hence, an incremental
INR2bn may be required to install ~20MW of WHRS, which will be considered in a
year’s time post acquisition.
 As per UTCL, there is a realisation gap of INR10-15/50kg bag versus CTIL brands
depending on region/locations. Brand transition will help improve EBITDA/t of these
assets.
 In addition, UTCL is looking to benefit from improved operating efficiencies (of CTIL
assets), lesser lead distance from West Bengal (WB) grinding unit and from reduced
overhead expenses such as marketing, packaging etc.
 Petcoke consumption in CTIL is ~42%, linkage coal is 43% and the balance is imported
coal. Management does not expect potential for any significant increase in usage of
petcoke in these assets.
 Currently, UTCL is targeting ~12 months to bring-in efficiency levels of CTIL assets at par
with that of UTCL. Given the combination of old (Raipur, Chhattisgarh) and new assets
(Manikgarh, Maharashtra), structurally, EBITDA margins of CTIL’s assets will remain a
tad below UTCL. Management indicated a structural EBITDA/t difference of ~INR100
(~INR64 related to limestone royalty and rest related to other costs) will remain despite
potential gains from efficiency enhancement and rebranding.
 CTIL’s WB grinding unit and Maharashtra plants are eligible for state incentives.
Together, the incentive income stood at ~INR700mn in FY18.
 The deal is expected to be consummated in six-nine months given requirement of
necessary statutory and regulatory approvals. UTCL is also confident of obtaining CCI’s
clearance.
 The Chhattisgarh unit (with 2.4mtpa cement capacity) is the oldest (~44 years) amongst
CTIL’s assets and, it may require a complete refurbishment/upgradation of the plant in
seven-eight years. However, further clarity will emerge post further deal
consummation.
 CTIL’s limestone reserves have an average life of ~37 years (and ~27 years in
Chhattisgarh).
 Current net block of the target assets is ~INR24bn.

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 UltraTech Cement

Table 1: Valuation
Particulars (INR mn) FY20E
Assumed EV/EBITDA multiple (x) (A) 14
EBITDA of UltraTech (incl. JPA) (B) 100,373
Assumed EBITDA of ETA Star (C ) 2,250
Total EBITDA (D ) = (B) + ( C) 102,623
Total EV (E) = (A) x (D) 1,436,719
Less: Consolidated Net debt (F) 124,417
Mcap (G) = (E) - (F) 1,312,302
Shares o/s (mn) (H) 275
Value per share (INR) (G) / (H) 4,779
Potential upside (%) 24.1
Source: Edelweiss research

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Cement

Company Description
UTCL, with pan-India presence, is the market leader in the domestic cement industry. With
acquisition of JPA’s assets, the company’s grey cement capacity has been enhanced to
~89mtpa (excluding ~4tmpa of overseas capacity) aggregating to market share of ~20%. The
company has 982MW thermal captive power plants that meet ~80% of its requirement.
Grasim, the flagship company of the AV Birla Group, is a majority shareholder in UTCL with
60.3% ownership. With commissioning of its greenfield project in Dhar, Madhya Pradesh,
UTCL’s total domestic grey cement capacity will jump to ~92.5mtpa. Also, the company
operates in the white cement segment with ~1.5mtpa capacity.

Investment Theme
Our investment thesis is following (a) Large ticket M/As as well meager capacity addition
programs (largely by industry leaders) gives us a greater comfort of secular profit increase in
the sector sooner than later. Our current estimates of EPS CAGR for Ultratech at ~25% over
FY17-20E can well continue till FY21/FY22E given rising utilization/consolidation (b) Post
culmination of the JPA deal, the operating leverage for Ultratech would probably be
amongst the highest in Indian cement space- 1% volume variation is positive ~2% to EPS and
1% in price 6-7% to EPS (c) Fair value at 14x FY20E EBITDA appears reasonable given position
in the cycle.

Key Risks
Sharp decrease in cement demand/prices may lead to further earnings downgrade.
Sharp increase in fuel cost/input cost will impact estimates

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Financial Statements
Key Assumptions Income statement (INR mn)
Year to March FY17 FY18 FY19E FY20E Year to March FY17 FY18 FY19E FY20E
Macro Total volume (mn tonnes) 50.2 60.7 71.9 79.0
GDP(Y-o-Y %) 6.6 6.5 7.1 7.6 Income from operations 238,914 297,900 368,050 427,722
Inflation (Avg) 4.5 3.6 4.5 5.0 Materials costs 40,245 46,797 57,517 64,447
Repo rate (exit rate) 6.3 6.0 6.0 6.5 Power and fuel 39,266 59,595 78,404 87,850
USD/INR (Avg) 67.1 64.5 66.0 66.0 Freight 58,452 72,816 88,894 99,604
Company Employee costs 14,134 17,062 19,722 21,694
EBITDA/ Tonne (INR) 990 970 1,026 1,271 Factory & admin expenses 37,128 42,798 49,772 53,754
Inst capacity (mtpa) 66 85 93 93 Total operating expenses 189,225 239,068 294,310 327,349
Capacity Utilisation (%) 73 70 76 84 EBITDA 49,690 58,832 73,739 100,373
Cement sales vol (mt) 50 61 72 79 Depreciation 12,679 17,636 19,668 20,972
Cement realiztn (INR/t) 4,760 4,911 5,119 5,416 EBIT 37,011 41,197 54,071 79,401
RM cost per tonne 802 771 800 816 Less: Interest Expense 5,714 11,863 12,294 11,235
P&F cost per tonne 782 982 1,091 1,112 Add: Other income 6,599.5 5,947.00 4,047.76 4,713.1
Freight cost per tonne 1,165 1,200 1,236 1,261 Profit Before Tax 37,760 33,018 45,825 72,879
Other expenses per tonne 740 706 692 681 Less: Provision for Tax 11,482 10,706 13,748 21,864
Total expenses per tonne 3,770 3,941 4,094 4,145 Add: Exceptional items (137) (2,263) - -
Effective tax rate (%) 30.4 32.4 30.0 30.0 Reported Profit 26,277 22,312 32,078 51,015
Debtor days 21 18 17 16 Adjusted Profit 26,372 24,205 32,078 51,015
Inventory days 60 54 52 51 Shares o /s (mn) 274 275 275 275
Payable days 44 41 40 40 Adjusted Basic EPS 96.1 88.1 116.8 185.8
Diluted shares o/s (mn) 274 275 275 275
Adjusted Diluted EPS 96.1 88.1 116.8 185.8
Adjusted Cash EPS 142.3 152.4 188.4 262.1
Dividend per share (DPS) 10.0 10.5 11.0 12.0
Dividend Payout Ratio(%) 12.5 15.5 11.3 7.8

Common size metrics

Year to March FY17 FY18 FY19E FY20E
Materials costs 16.8 15.7 15.6 15.1
Power and fuel 16.4 20.0 21.3 20.5
Freight 24.5 24.4 24.2 23.3
Operating expenses 79.2 80.3 80.0 76.5
Depreciation 5.3 5.9 5.3 4.9
EBITDA margins 20.8 19.7 20.0 23.5
Interest Expense 2.4 4.0 3.3 2.6
Net Profit margins 11.0 8.1 8.7 11.9

Growth ratios (%)

Year to March FY17 FY18 FY19E FY20E
Revenues 0.8 24.7 23.5 16.2
EBITDA 7.4 18.4 25.3 36.1
PBT 14.5 (12.6) 38.8 59.0
Adjusted Profit 11.3 (8.2) 32.5 59.0
EPS 11.3 (8.3) 32.5 59.0

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Balance sheet (INR mn) Cash flow metrics

As on 31st March FY17 FY18 FY19E FY20E Year to March FY17 FY18 FY19E FY20E
Share capital 2,745 2,746 2,746 2,746 Operating cash flow 47,213 41,707 51,093 70,458
Reserves & Surplus 236,665 255,517 283,970 331,031 Financing cash flow (23,826) 110,019 (18,625) (33,954)
Shareholders' funds 239,410 258,263 286,716 333,777 Investing cash flow (23,635) (172,877) (26,330) (34,900)
Long term borrowings 42,374 139,132 124,132 94,132 Net cash Flow (249) (21,151) 6,139 1,604
Short term borrowings 20,403 37,123 37,123 37,123 Capex (12,274) (160,494) (26,330) (24,900)
Total Borrowings 62,777 176,255 161,255 131,255 Dividend paid (3,085) (3,460) (3,625) (3,954)
Def. Tax Liability (net) 27,736 31,741 31,741 31,741
Sources of funds 329,923 466,259 479,712 496,772 Profitability and efficiency ratios
Gross Block 358,463 489,306 519,306 - Year to March FY17 FY18 FY19E FY20E
Net Block 228,982 342,190 352,522 341,550 ROACE (%) 14.5 12.8 13.2 18.4
Capital work in progress 11,671 14,739 11,069 25,969 ROAE (%) 11.6 9.7 11.8 16.4
Intangible Assets 3,335 29,919 29,919 29,919 Inventory Days 60 54 52 51
Total Fixed Assets 243,989 386,847 393,509 397,437 Debtors Days 21 18 17 16
Non current investments 21,324 22,663 22,663 22,663 Payable Days 44 41 40 40
Cash and Equivalents 76,237 40,513 46,652 58,256 Cash Conversion Cycle 37 31 30 27
Inventories 22,250 31,015 33,394 36,705 Current Ratio 2.0 1.7 1.8 1.9
Sundry Debtors 12,762 17,142 17,618 19,213 Gross Debt/EBITDA 1.3 3.0 2.2 1.3
Loans & Advances 6,841 34,207 34,207 34,207 Gross Debt/Equity 0.3 0.7 0.6 0.4
Other Current Assets 9,409 10,376 10,376 10,376 Adjusted Debt/Equity 0.3 0.7 0.6 0.4
Current Assets (ex cash) 51,262 92,740 95,595 100,501 Interest Coverage Ratio 6.5 3.5 4.4 7.1
Trade payable 17,138 23,435 25,638 29,015
Other Current Liab 45,750 53,069 53,069 53,069 Operating ratios
Total Current Liab 62,888 76,504 78,707 82,085 Year to March FY17 FY18 FY19E FY20E
Net Curr Assets-ex cash (11,627) 16,235 16,888 18,417 Total Asset Turnover 0.7 0.7 0.8 0.9
Uses of funds 329,923 466,259 479,712 496,772 Fixed Asset Turnover 1.0 1.0 1.0 1.1
BVPS (INR) 872.3 940.5 1,044.1 1,215.5 Equity Turnover 1.0 1.2 1.4 1.4

Free cash flow (INR mn) Valuation parameters

Year to March FY17 FY18 FY19E FY20E Year to March FY17 FY18 FY19E FY20E
Reported Profit 26,277 22,312 32,078 51,015 Adj. Diluted EPS (INR) 96.1 88.1 116.8 185.8
Add: Depreciation 12,679 17,636 19,668 20,972 Y-o-Y growth (%) 11.3 (8.3) 32.5 59.0
Interest (Net of Tax) 3,976 8,017 8,606 7,864 Adjusted Cash EPS (INR) 142.3 152.4 188.4 262.1
Others (598) (4,012) (8,606) (7,864) Diluted P/E (x) 40.1 43.7 33.0 20.7
Less: Changes in WC (4,878) 2,246 652 1,529 P/B (x) 4.4 4.1 3.7 3.2
Operating cash flow 47,213 41,707 51,093 70,458 EV/tonne (USD/tonne) 230 214 189 182
Less: Capex 12,274 160,494 26,330 24,900 EV / Sales (x) 4.4 4.0 3.2 2.6
Free Cash Flow 34,939 (118,787) 24,763 45,558 EV / EBITDA (x) 21.0 20.3 15.9 11.3
EV/EBITDA (x)+1 yr fwd. 17.7 16.2 11.7 -
Dividend Yield (%) 0.3 0.3 0.3 0.3

Peer comparison valuation

Market cap Diluted P/E (X) EV / EBITDA (X) EV / Sales (X)
Name (USD mn) FY19E FY20E FY19E FY20E FY19E FY20E
UltraTech Cement 15,537 33.0 20.7 15.9 11.3 3.2 2.6
ACC 3,707 24.4 17.6 11.0 8.2 1.5 1.3
Ambuja Cement Ltd 6,067 24.3 18.4 13.9 10.7 2.5 2.2
Shree Cements 8,224 34.5 22.4 18.1 12.8 4.5 3.7
Median - 28.7 19.6 14.9 11.0 2.9 2.4
AVERAGE - 29.1 19.8 14.7 10.8 2.9 2.5
Source: Edelweiss research

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Additional Data
Directors Data
Kumar Mangalam Birla Chairman Mrs. Rajashree Birla Director
G. M. Dave Independent Director Mrs Sukanya Kripalu Independent Director
S. B. Mathur Independent Director Mrs. Renuka Kamath Independent Director
D. D. Rathi Non- Executive Director K. K. Maheshwari Managing Director
Arun Adhikari Independent Director Mrs. Alka Bharucha Independent Director
Atul Daga Whole-time Director and Chief Financial Officer

Auditors - Deloitte Haskins & Sells, G. P. Kapadia & Co.

*as per last annual report

Holding – Top 10
Perc. Holding Perc. Holding
Life Insurance Corp of India 2.33 Standard Life Aberdeen Plc 1.98
JPMorgan Chase & Co 1.87 Massachusetts Mutual Life Ins 1.70
Blackrock 1.20 Capital Group Companies Inc 1.10
Vanguard Group 1.07 Franklin Resources 0.89
SBI Funds Management 0.51 Kotak Mahindra 0.44
*as per last available data

Bulk Deals
Data Acquired / Seller B/S Qty Traded Price

No Data Available
*in last one year

Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
07 Feb 2018 Trapti Trading and Investments Private Limited Sell 92490.00
27 Jul 2017 Turquoise Investments and Finance Private Limited Sell 23000.00

*in last one year

7 Edelweiss Securities Limited

 RATING & INTERPRETATION

Company Absolute Relative Relative Company Absolute Relative Relative

reco reco risk reco reco Risk
ACC BUY SP M Ambuja Cement Ltd HOLD SU M
Grasim Industries BUY SO M India Cements BUY SP H
JK Cement BUY SO M Shree Cements BUY SO M
UltraTech Cement BUY SO M

ABSOLUTE RATING
Ratings Expected absolute returns over 12 months

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%

RELATIVE RETURNS RATING

Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return

Sector Performer (SP) Stock return > 0.75 x Sector return

Stock return < 1.25 x Sector return

Sector Underperformer (SU) Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe
within the sector

RELATIVE RISK RATING

Ratings Criteria

Low (L) Bottom 1/3rd percentile in the sector

Medium (M) Middle 1/3rd percentile in the sector

High (H) Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return

Equalweight (EW) Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

Underweight (UW) Sector return < 0.75 x Nifty return

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 UltraTech Cement

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.
Board: (91-22) 4009 4400, Email: research@edelweissfin.com

ADITYA
Digitally signed by ADITYA NARAIN
DN: c=IN, o=EDELWEISS SECURITIES LIMITED,
Aditya Narain ou=HEAD RESEARCH, cn=ADITYA NARAIN,
serialNumber=e0576796072ad1a3266c27990f2
0bf0213f69235fc3f1bcd0fa1c30092792c20,
Head of Research
NARAIN
postalCode=400005,
2.5.4.20=3dc92af943d52d778c99d69c48a8e0c8
9e548e5001b4f8141cf423fd58c07b02,
aditya.narain@edelweissfin.com st=Maharashtra
Date: 2018.05.21 21:09:56 +05'30'

Coverage group(s) of stocks by primary analyst(s): Cement

ACC, Ambuja Cement Ltd, Grasim Industries, India Cements, JK Cement, Shree Cements, UltraTech Cement

Recent Research

Date Company Title Price (INR) Recos

16-May-18 JK Cement Impressive volume surge 975 Buy

offset by high cost;
Result Update
16-May-18 Cement Clinker: Catch the upcycle;
Sector Update
04-May-18 Ambuja Variable costs surprise; 237 Hold
Cements Result Update

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe Rating Interpretation

Buy Hold Reduce Total Rating Expected to

Rating Distribution* 161 67 11 240 Buy appreciate more than 15% over a 12-month period
* 1stocks under review
Hold appreciate up to 15% over a 12-month period
> 50bn Between 10bn and 50 bn < 10bn
743
Reduce depreciate more than 5% over a 12-month period
Market Cap (INR) 156 62 11
594

One year price chart

446
(INR)

4,800
297 4,500

149 4,200
(INR)

- 3,900
Apr-14

Sep-14
Feb-14

Mar-14

Jun-14

Dec-14
Jul-14

Aug-14

Oct-14

Nov-14
May-14
Jan-14

3,600

3,300
Dec-17
Aug-17

Oct-17

Apr-18
May-17

May-18
Nov-17

Jan-18
Sep-17

Feb-18
Jun-17

Mar-18
Jul-17

UltraTech Cement

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10 Edelweiss Securities Limited

 UltraTech Cement
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11 Edelweiss Securities Limited

 Cement

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12 Edelweiss Securities Limited