Jul 17, 2017 12:08 PM IST | Source:

Why does Motilal Oswal see 17% upside on UltraTech Cement?

Broking firm highlights asset creation by way of JP Associates’ acquisition as well as transitory earnings dilution.

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Motilal Oswal on Monday reiterated its buy stance on UltraTech Cement, with a target price that implies an upside of 17 percent at Rs 4,936.

The broking firm highlighted the enterprise value per tonne to be moderated, adjusting the acquisition of JP Associates’ assets and capacity expansion at its Dhar plant.

“As JP Associates’ assets are acquired at USD 120/tonne as against UltraTech’s EV/tonne of USD 245, blended EV/tonne appears meaningfully moderated at USD 195/tonne. This implies a reduction in the 50 percent premium over peers’ EV/tonne to 25-30 percent,” the brokerage house said in its report.

Further, it highlighted that its clinker capacity additions over the next two years are at a much faster pace.

The cement major could add a clinker capacity of 19 million tonnes over FY17-19, led by JP Associates’ acquisition and Dhar expansion, similar to the clinker capacity added over FY11- FY17. Thus, it would be recreating the assets it created over the last six years in just two years, it explained in its report.

Moreover, the last two limestone bids indicate a sharp increase in the cost of acquisition of limestone. “Players acquiring new capacities would be at a cost disadvantage to players with legacy assets. Companies like UltraTech Cement that hold large limestone reserves are likely to get premium multiples on account of the significant competitive edge they possess,” it added.

Motilal Oswal also said that the company’s cost measures has reflected in their curtailment in the last few quarters. This in an environment where underlying fuel prices have almost doubled.

“Improved power consumption norm, higher proportion of alternative fuels and raw materials (AFR), greater reliance on waste heat recovery systems (WHRS), and higher sales from split grinding units have helped contain its unitary costing,” the report added.

In terms of earnings, the acquisition of JP Associates’ assets could dilute the profit before taxes (PBT) over the next current and next fiscal. The breakeven is seen from the first half of FY20, it added.

The stock has gained around 4 percent in the past one month, while its three-day gain stood at just over a percent. At 11:56 hrs UltraTech Cement was quoting at Rs 4,231.35, up Rs 12.95, or 0.31 percent on the BSE. It touched an intraday high of Rs 4,269.40 and an intraday low of Rs 4,224.05.

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