Ultratech Cemco reported a 10% growth in revenue during Q1FY09, led by higher proportion of ready-mix concrete (RMC) sales as well as better realizations.
Net realizations stood at Rs3,503 per tonne as against Rs3,082 per tonne for Q1FY08. Adjusted with the RMC revenues of Rs1,150 million, cement realizations declined marginally as compared to Q4FY08.
Net profit for the current quarter grew by 2% year-on-year (y-o-y) due to higher revenues as well as higher other income. However, it is impacted by higher operating expenses as well as higher depreciation.
We have fine tuned our revenue estimates marginally based on lower export volumes. At current market price, stock is trading at 6.7x FY09 P/E multiples and 4.2x on FY09 EV/EBITDA multiples.
We believe that cement industry is expected to witness an oversupply situation by Q2FY09, thereby resulting in lack of pricing power with the cement manufacturers.
Increasing costs coupled with lower realizations is continuously putting pressure on the operating margins.
In a scenario of oversupply, lower realizations, declining operating margins and de-growth in profitability which is expected for FY09-FY10, we believe that company would trade at the lower end of the valuation band. This is inline with the last downturn cycle of cement.
We value the company at a discount to the target multiples of benchmark stock ACC as it was during last downturn cycle.
We reduce our target valuation multiples for the company and arrive at a target price of Rs640. At our target price, stock would trade at 8x FY09 P/E estimates and 5x on EV/EBITDA multiples and continue to maintain REDUCE on the stock.