Ultratech Cement Ltd (UTCL) Q1FY08 net profit at Rs 2.59 billion is above our expectations primarily because better than expected cement realizations and lower sales of traded cement. The net revenue growth of 15.7% to Rs 13.65 billion was entirely driven by improvement in cement realisations as cement volumes were flay on a yoy basis. Operating profit at Rs 4.33 billion grew in line with the topline and hence OPMs for the quarter were flat at 31.8%. Other income doubled to Rs 268.9 million. Interest costs declined by 10.8% on account of repayment of debt. The net profit at Rs 2.59 billion was above our expectation and showed a yoy growth of 23%. On account of better than expected numbers and also on account of additional 0.9 million tonne expansion at its Tadipatri plant Andhra pradesh, we are upgrading our earnings estimates for UTCL by 11% for FY2008 and by 11% for FY2009. The stock is currently trading at 11.4x its FY2009 earnings and USD 130.1 for its FY2009 cement capacity . The valuations though not significantly expensive do not provide much head room on account of significant capacity additions of 70 million tonnes lined up by the industry over next two year. This we believe would disturb the demand supply equation and would weaken pricing power of cement producers. Moreover with UTCL amongst the most leveraged company to cement prices the company’s earnings in a downturn scenario would suffer the most. We maintain our REDUCE rating on the stock with a revised price target of Rs 900.

Result Highlights

Ultratech Cement Ltd (UTCL) Q1FY08 net profit at Rs 2.59 billion is above our expectations primarily because better than expected cement realizations and lower sales of traded cement. Net revenue growth of 15.7% to Rs 13.65 billion was entirely driven by improvement in cement realisations as cement volumes were flay on a yoy basis. Cement realisation at Rs 3054 per tonne grew by 15% yoy. UTCL’s operating profit for the quarter increased by 15.7% to 4.34 billion in line with the growth in topline, as operating profit margin remained flat at 31.8%. On the cost front the total cost at Rs 2084 moved up by 15.1% yoy primarily because of 28.6% increase in raw material cost, 11% increase in freight cost and 26% increase in other expenditure per tonne. Other income for the quarter doubled to Rs 268.9 million as surplus cash was utilised for investment purpose. Interest costs declined by 10.8% to Rs 202 million on account of repayment of debt, which was aided by higher operational cash flows. UTCL’s net profit for the quarter at Rs 2.59 showed a yoy growth of 23%.

UTCL enhances its capex plans

UTCL had planned a capacity expansion of 4mt at its Tadipatri unit in Andhra Pradesh. But now the company has hiked its expansion plan by 0.9mt to cater to the growing demand in the southern markets and to benefit from the availability of slag. This plant is all set to start commercial operation from March 2008. We had expected a delay of 3-4 months, but the company is confident of commercial operation by March 2008. UTCL has increased its capex plans from Rs 27 billion to Rs 33 billion over the next three years. The incremental capex is for the following projects

* Setting up a new 33 MW TPP in Awarpur, Maharashtra.
* Increasing grinding capacity by 2 Million tonne at Gujarat
* Setting ready mix plants across the country.

Upgrading earnings

On account of better than expected numbers, higher cement prices in the southern region (where UTCL close to 20% of its produce) and also on account of additional 0.9 million tonne expansion at its Tadipatri plant Andhra pradesh, we are upgrading our earnings estimates for UTCL by 11% for FY2008 and by 11% for FY2009. Our EPS estimates for UTCL now stand at Rs 77.2 for FY2008 and Rs 86.7 for FY2009.

Valuations

The stock is currently trading at 11.4x its FY2009 earnings and USD 130.1 for its FY2009 cement capacity. The valuations though not significantly expensive do not provide much head room on account of significant capacity additions of 70 million tonnes lined up by the industry over next two year. This we believe would disturb the demand supply equation and would weaken pricing power of cement producers. Moreover with UTCL amongst the most leveraged company to cement prices the company’s earnings in a downturn scenario would suffer the most. We maintain our REDUCE rating on the stock with a revised price target of Rs 900.