Ultratech
Narrow moat-rated Ultratech’s fourth-quarter 2015 results were in-line with our expectations, and reinforced our forecast for a gradual recovery in demand and a
challenging pricing environment in the near term stemming from subdued demand and competition in the well-supplied Indian cement industry.
Fourth quarter net sales increased by 5.4% to Rs 65 billion on account of a 5% decline in sales volumes and an 11% jump in price realizations versus a year ago and were largely in-line with our estimates. Importantly, adjusted EBITDA per ton increased by 10% to Rs 1,170 per ton compared to last year due to lower energy and fuel costs. We see weakness
in sales volumes as temporary as demand for cement from construction industry dropped in response to the 10% to 40% increase in cement prices in January across various parts of India. Prices have cooled off in April and will imply a return of demand in the next quarter.
We maintain our narrow economic moat rating and fair value estimate of Rs 2,900 per share. We have lifted our five-year average EPS growth forecast to 25% from 21% earlier on the back of market share gains due to recent acquisitions, and new bulk terminal and grinding units, which will help in improving plant-to-market mix, and thereby reduce logistics costs. We continue to forecast strong, double-digit revenue growth in the coming few years as the company builds more capacity.
However, this is not material enough for us to change our fair value estimate. We view the company's shares as fairly valued.
We maintain its narrow economic moat rating, underpinned by the industry-level entry barriers that stem from the proximity to raw-material sources and more than 30 years of mine life of its limestone reserves as raw material, 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.
Shree Cement
Shree Cement’s third quarter 2015 result was in line with our expectations. Sales fell by 5% to Rs 15.7 billion versus last year, while adjusted EBITDA per tonne came at Rs 866/ tonne, marginally higher than our estimate.
Still, the full-year trend remains weak as fiscal 2015 nine month average EBITDA per tonne is 5% lower than a year ago. Shree recorded a 5% decline in price realisations and a 4% increase in sales volume. This was opposite to the industry trend in this quarter and reflected that Shree tried to push volumes at the cost of pricing as demand fell towards the later half of the quarter. Higher costs and a pick-up in demand from housing and infrastructure activities has taken longer than our expectations.
We maintain our narrow moat rating and our fair value estimate of Rs 9,200 per share. Our fair value estimate implies enterprise value/tonne of $200, which is in-line with peer companies. We estimate five year average 17% growth in both revenue and earnings per share and EBITDA margins to be maintained at three year average of 28%.
At the current share price, Shree is overvalued and the market seems to be pricing in a steep margin improvement despite the industry being well-supplied during our forecast period. Price cuts in February and April are indicative of high competitive intensity owing to subdued cement demand. Results have affirmed our last quarterly note, where we waxed cautious about aggressive expectations for gains in capacity utilization and margins
in the near term.
We believe fiscal 2016 is likely to see a gradual recovery in demand due to higher government spending. Our High fair value uncertainty rating reflects exposure to
construction and housing which are cyclical and linked to economic activity. Shree’s narrow economic moat is underpinned by industry-level entry barriers that benefit
Shree stem from the proximity to raw-material sources, capital intensity, and the difficulty in transporting cement over long distances.
