Valuation of UltraTech Cement Limited
Hi folks, in this post, I will be analyzing Ultratech cement prospects by doing a valuation of the company.
A brief about the company
Ultratech cement is a flagship company of Aditya Birla Group and is the largest cement player in India.
In fact, it is the third-largest company in the world excluding China, and the only company outside of China to have more than 100 MTA capacity.
It has a network of over 1 lakh channel partners across India along with a Unique brand retail chain called Ultratech building solutions with over 2500 outlets across the country.
The company recently became the first company in India and the only second in Asia to issue dollar-based sustainability-linked bonds.
In the past, the company has evolved from just being a cement manufacturing company to a building solutions provider with a focus on innovative & sustainable business processes.
Past Track Record
In the past five years, despite the ongoing slowdown in the real estate market, the company managed to grow at 12% CAGR in Revenues while EBITDA grew at 20% CAGR.
While continuing to maintain healthy balance sheet metrics.
Coming on the valuation of the company,
Assumptions
RBI has kept the FY22 GDP forecast at 9.5%. Historically, the cement industry has grown at a higher rate than GDP.(1.2x as per sources) Additionally, 1% growth is added for Ultratech as it is the industry leader.
The GDP growth rate gradually reduces from 9.5% in FY22 to 7% in FY26.
As we can see from the Income statement, Cement production is quite an energy-intensive process with power & fuel costs contributing at least 20% of the final price.
Additionally, freight contributes to a whopping 25% of the total final price.
Now, as I am aware of fuel prices, they have been on a rising spree for the past few months. So, this will surely have a great impact on Power & Fuel as well as Freight cost for the company.
Additionally, the company will also have to transfer these increased input prices to the final product.
Considering this,
Per tonne Fuel and Freight, prices are assumed to increase 15% y-o-y (Inflation/CPI) in FY22 while realization should increase by 22%, assuming it will be able to transfer input price increases effectively while utilizing its market leader position in India.
The company has managed to reduce its debt/equity ratio in the last few years from 0.72 to 0.4. It is assumed that it will remain at the same level in the future as well i.e. 0.4.
Additionally, the cost of debt is considered to remain at 6.3%, which is the current interest rate on Senior Unsecured debt of the company.
(A senior unsecured debt has no specific asset or cash flow of the comapny attached to it and is a better reflection of the actual cost of debt of the company.)
The additional assumption about interest rate :
Risk-free rate - 6.3% (10Y GOI bond)
Market Risk premium -6.85%
The sustainable growth rate is assumed to be 6%
The beta of the company - 1.12
Coming on CAPEX :
An increase in capacity for FY22 is already given in the annual report of the company.
From this, I came to the utilization for FY22 and accordingly assumed it for years after that.
From CAPEX/MTA guidance for FY22, I arrived at CAPEX for FY23-FY26 by linking it to capacity.
Final Output :
After running DCF, I have arrived at a target price of 7,486 a share for the stock. With an assumption that the company will be able to maintain the same P/E multiple, the target price from FY23-FY26 is 8,362; 10,149; 12,107; and 14,011 respectively.
The latest closing price for the share is 7,929. At this price, the stock can give compounded annual return of 15% by FY26.
But, are the market overvaluing this company, or have I undervalued the company itself?
Here is the catch I believe,
The company is going to accumulate a lot of cash balances as per this model in the coming years.(Can see this in the image above) Now, I have assumed that on cash balances, the company will be earning at bank interest rates i.2. 2.5%.
In my financial model, I have forecasted core operating metrics for the company. Assuming the rest of the metrics will remain at the same level, which is why this has happened.
But,
In reality, the company will surely deploy the excess cash somewhere to earn more than just bank interest rate.
Examples can be putting it into mutual funds or starting a new line of services, R&D or expanding into a new market, or even acquiring a new company in the same business or in allied business to diversify its operations.
All this can surely bring more return to investors than bank rates.
Is this what is getting factored into the model? Maybe yes, maybe no.
Only time can tell this, by that time why don’t you think about it tell me about it in the comments section below ?
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Sources :