Investors can buy the stock of UltraTech Cement. The company is well-placed to benefit from the demand revival, thanks to its December 2014 acquisition of two cement units of JP Associates, both in Madhya Pradesh, having a total annual capacity 4.9 million tonnes. The deal was struck for about $150/tonne.

With cement companies trading at an enterprise value of $140-180/tonne and greenfield expansions happening at $120-125/tonne, the new assets haven’t come cheap. But the premium appears justified considering that the new units in MP have now made UltraTech a leading player in central India, helping it cater to markets in Uttar Pradesh and Bihar as well. Central India offers good opportunities for cement players given the region’s poor infrastructure and industrial facilities.

UltraTech, the largest cement player in India, will have a total capacity of 71 million tonnes per annum (mtpa) as the several ongoing capacity expansions get completed in the next one year or so. 

Cement demand, which grew at 6.09 per cent in 2014 (4.6 per cent in 2013), is likely to get a boost in the current year from the Centre’s promised spending on infrastructure and rural housing. Increase in demand should see cement prices go up and, thereby, help improve the profitability of manufacturers.

Uptrend in prices

Cement prices in the North recovered in January to ₹274/bag after dropping to about ₹250/bag in December. In the South, after a sharp increase in June last year, prices are now more or less stable at ₹300-320/bag.

The pricing power of cement manufacturers should improve given the limited new capacity additions and the narrowing demand-supply gap.

In the nine months ending December 2014, UltraTech reported a 15.9 per cent increase in sales led by robust volume growth and better realisations. Net profit growth was muted at 7 per cent due to higher interest expenses.

Interest outgo during the period rose to ₹397.5 crore, up 60 per cent from the same period in 2013, due to additional borrowing to fund capacity expansion and new acquisitions.

The debt-to-equity ratio, however, is still at a comfortable 0.19. Interest cover stands at 5.9 times. Going forward, cost savings from a drop in commodity prices and increased usage of pet coke as fuel should help UltraTech improve its operating margins.

Even at the current price of ₹3,100, the stock appears a good investment. It discounts its estimated earnings for 2016-17 by 18 times. This lies at the midpoint of its five-year valuation band of 15-24 times. The valuation is also at par with peers such as ACC and Ambuja Cements that trade at 18-20 times.

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