Buy UltraTech Cement With Target Of Rs 1177

ULTRATECH CEMENTThe cement industry has suffered due to over supply and substantial rise in costs. Cement demand is expected to pick up in the current quarter and continue until the onset of monsoon, giving price flexibility to manufacturers. Although all is still not well for the sector, the intense pain of Q2FY11 appears to be behind us.

UTCEM has the most balanced geographical spread of cement capacities with major demand centres i. e. North, West and South each accounting for 25% of total capacity. We expect UTCEM to achieve volume of 42mn mt in FY12. 2) The demand-supply gap in the South had widened due to newer capacities being commissioned and slump in demand in key state of AP. With realisation plummeting, industry moved into the red. A production discipline undertaken by the cement industry has supported realisation growth and marginal profit for incumbents. The discipline is expected to hold on until visible growth in demand emerges.

Developmental projects in AP, which were stalled, should get a push considering easing of political tensions. AP has been the trouble spot for the cement industry. 3) With growth in realisations, we expect a 300bps expansion in margins in FY12. 4) UTCEM has lined up capex of Rs100bn to add 9.2mn mt capacity over the next three years.

Our FY11 and FY12 earnings estimates are Rs52.6 and Rs69.1 respectively. Our FY12E earnings estimate is 5.2% higher than consensus estimate of Rs65.7. We have a 'BUY' recommendation on the stock with a target price of Rs1,177, which discounts FY12E EBITDA by 8x.

1) Any change in the excise duty structure to rein in price correction would hamper profitability; 2) Escalation of unrest in AP in view of the Telangana issue stalemate would undermine demand growth;