Q4FY07 Result Update

• Ultratech reported a strong 43% y-o-y jump in Net sales driven by 12% jump in cement volumes and 29% jump in cement realisations (realisations are higher due to a low base) .
• Operating margins have gone up by a 912 bps y-o-y. Operating profits are up by 113% y-o-y. EBITDA per tonne is almost 2x over last year to Rs 810.
• Despite an expectation of a downturn in cement prices in FY09 we expect Ultratech to be slightly hit due to strong efficiency gains due to investments in CPP. However valuations look expensive reiterate sell with a revised one-year price target of Rs 700.

Results in line-Growth to decelerate dramatically from Q1FY08

Low base in cement prices and strong double digit volume growth ensured another strong performance from Ultratech Cement. Net profits have risen 184% y-o-y. We expect such dramatic growth rates to moderate since Q1FY08 where the low base effect of cement prices is eliminated. Apart from an increase in raw material costs sequentially (perhaps due to higher blending) and higher freight cost most other costs are lower on a per tonne basis.

Strong capex in the pipeline

The company has lined up a capex of Rs 2698 crores which includes 4mtpa plant at Andhra Pradesh and is also setting up an aggregate 192MW CPP in Andhra Pradesh, Gujarat and Chattisgarh. This is over a two year period with most of the capex to come online in FY09.

Maintain Sell on cyclical downturn

The company’s positives include its high leverage to cement prices, locational advantage (for cement exports), huge scope for efficiency improvement, and a powerful parent. The company is expected to see a sharp deceleration in growth from Q1FY08 as the low base effect disappears. Plus large capa city additions in the cement sector in FY09 is expected to put pressure on realisation, on the valuation front the stock seems slightly expensive, trading at a PE 12x FY08E and EV/EBITDA of 6.8 x FY08E. We reiterate sell with a one-year price target of Rs 700.