UltraTech’s third quarter results affirmed our thesis once again.
Price hikes taken in the first half of this year were able to offset the seasonal softening of prices in the quarter. We are seeing revival in demand and expect both capacity utilization and price realizations to further improve in the fourth quarter. Borrowing costs continue to surge reflecting our estimate of higher interest expense over the next three years as Ultratech pursues debt funded acquisitions. Post results, we do not see any material change to our forecasts, moat rating and fair value.
We maintain our fair value of Rs 2,600 per share.
We are already incorporating an improvement of about 4% in adjusted EBITDA margins over 2014-17 period and more than 50% jump in cement capacity. For our fair value to jump to current stock price of Rs 3,150 per share, 8% jump in adjusted EBITDA margin would be required which is clearly far-fetched and that’s why, we believe stock has run ahead of its fair value now.
We maintain our narrow moat rating for the company, which is underpinned by the industry-level entry barriers that stem from the proximity to raw-material sources, the capital intensity of manufacturing plants and cement’s low value-to-weight ratio. High fair value uncertainty reflects exposure to construction and housing which are cyclical and linked to economic activity.
Our capital expenditure estimates include about 10 million tons of acquisitive growth as we believe that Ultratech, being the market leader and possessing a strong balance sheet will continue to pursue consolidation in the cement industry. Long term demand for building materials remains attractive as the Indian government pursues its spending on infrastructure and housing.
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