Advance Corporate Finance Assignment

VALUATION OF ULTRATECH CEMENT

Economy, Industry & Company Analysis

SUBMITTED TO
Prof. Hemant Kulkarni

SUBMITTED BY
Aditya Bikram Singh 2016E01
Somya Goyal 2016E48
 Introduction
Part of the Aditya Birla Group and division of Grasim Industries

Parent Company Grasim Industries

Category Construction Materials- Cement

Sector Real Estate and Constructions

STP

Segment Tier I/ II/ III cities, Public Sector/ Private Sector, Customer/ Builder
Customers and Builders in both Public and Private sector in all tier
Target cities

Positioning High strength and reliable cement

 Economy Analysis
The growth of infrastructure is directly related to the GDP (gross
domestic product) growth.
The realistic prediction for GDP growth is in the range of 7 to 7.5 per
cent for the current fiscal.
And going by that estimate, cement demand would rise by seven to 8
per cent, or may touch 8.5 per cent. The production in FY15 was
around 270 million tons (MT).
But with demand growth showing a sluggish trend during the first half
of FY16, the pace of recovery in cement industry is expected to be
moderate at 3.8-4.0% during 2015-16

The primary sector which mainly constitutes Agriculture is declining. Shift towards /away from specific economy sectors
However, the growth of secondary sector has been very slow vis-a-
vis the services clearly indicating that there is a lot of scope for the
growth of secondary sector in India.
Growth of Indias leading cities and the evolution of some of our
major commercial office spaces has emerged as the backbone of
Indias organized real estate landscape
Indias housing landscape also witnessed vast transformations over
the last 10 years, shifting from largely independent low-rise plotted
developments to high-rise apartment complexes.
 Economy Analysis
Inflation expectations
The official inflation rate dipped to 1.5% last
month, the lowest in almost two decades.
Inflation displayed a mixed picture in FY17.
Retail (CPI) inflation from 5.4% in Apr16 to 3.8%
in Mar17
Aided by lower food prices, the wholesale price
index (WPI) inflation increased continuously
during the year from 0.8% in Apr16 to end the
year at 5.7% in March17 with the increase in fuel
and manufactured good prices.
Inflation (WPI and CPI) continued to be within the
RBIs target levels of 4% with a band of -/+ 2%.

Consumer prices in India went up 5.69 percent year-on-year in January of 2016, higher than 5.61 percent in December of 2015 and accelerating
for the sixth straight month.
It is the highest figure since August of 2014 and above market expectations of 5.4 percent.
Food inflation increased to 6.85 percent from 6.4 percent in December, also the highest in seventeen months
Inflation Rate in India averaged 7.90 percent from 2012 until 2016, reaching an all time high of 11.16 percent in November of 2013 and a record
low of 3.69 percent in July of 2015 in the ongoing fiscal, there is an upside risk to the inflation due to a possible increase in global crude oil prices
and firming up of global metals prices.
Economy Analysis
Economic performance expectations (Growth expectations
for India vis--vis world)
The Indian economy is expected to embark on higher economic growth trajectory in FY18 owing to proactive
measures taken by the government as well as favorable economic conditions expected to prevail during the
course of the year.
The main driving forces in FY18 would be
Increased government spending in infrastructure
Pick up in private investment
Good monsoon
Expected surge in consumer spending with pent up demand being satiated
The Goods and Services Tax (GST), which was implemented from July 1, 2017, has potential to spur the economy
further
The economic outlook of the Indian economy looks positive with the country expected to grow at more than 7.5%
in FY18 before moving past the 8% trajectory in FY19.
Certain threats, however, prevail in terms of upside risk to inflation, increasing global commodity prices especially
crude oil prices, slower growth in investment and credit, rising bad loans issue and uncertain trade prospects with
appreciating rupee and uncertain global economic conditions.
Globally, protectionism adopted by the US and higher interest rates by the Fed, revival in European countries and
higher growth in China causing diversion of funds from India could counter the prospective growth story of the
country, going ahead.
 Choice of industries based on global trends
2nd largest producer of cement in the world, 8% of the total global production
Total capacity of 390 million tons (MT) after China
Cement is a cyclical commodity with a high correlation with GDP
lot of potential for development in the infrastructure and construction sector
Recent government initiatives such as development of 98 smart cities, boost to the sector
Expecting such developments in the country and aided by suitable government foreign
policies, several foreign players have invested in the country in the recent past
Lafarge-Holcim
Heidelberg Cement
Vicat
Ready availability of the raw materials for making cement, such as limestone and coal
The housing sector is the biggest demand driver of cement, accounting for about 67% of
the total consumption
The other major consumers of cement include
Infrastructure(13%)
commercial construction (11%)
industrial construction (9%)
 Industry Analysis
97% of the installed capacity is
accounted for
by large producers, around 40 in
number
21 top companies control 90% of the
market
40% of the market is controlled by two
groups, Holcim and Aditya Birla Group

The cement industry has evolved in the form of clusters across the country due to the concentration of limestone reserves in
certain states.
The cyclical nature of the industry, nature of the commodity and transportation cost requires cement plant to be located in
the market it serves. Also, the availability of Limestone, key raw material plays a vital role in the location of a companys plant.
Regulatory Issues & Challenges
Risk Index of Cement Sector
Competitive Scenario
 Michael Porters Structural Analysis
Entry Barriers- High Huge capital investments required
present substantial barriers to entry and achieving economies
of scale

Suppliers Power- Moderate Cement players have to depend

on the railways for carriage outward and local coal companies
for fuel, although diversification of freight options and fuel
sources is diminishing the suppliers power

Buyers Power- Low Substantial market concentration among

large players ensures low bargaining power of buyers

Substitute Threat- Low Although there are partial substitutes

such as asphalt, glass, steel, wood, etc; practically cement has
no direct substitutes

Interfirm Rivalry- Low The Indian cement market is

oligopolistic in nature, characterized by tacit collusion, where
large players partially control supply for better price disciple
 Company Analysis
Fund flow analysis

* Short Term Borrowings and Current maturities of Long Term debts have been included in Loan Funds.

Profitability analysis
A higher operating margin is more favorable as it shows
that company is making enough money from its ongoing
operations to pay for its variable and fixed costs.
High net profit ratio shows how well a company manages
its expenses relative to its net sales and what % of net
profit company is earning out of total sales.
 Trend analysis

UltraTech Cement Limited has Closed at 3931.60 with a NEGATIVE SLOPE of -1.94 and has Closed BELOW the Trend Line Value
of 4010.25. As per the Trend Line Analysis, UltraTech Cement Limited is in NEGATIVE trend over the 3-Months period and is
a SELL with a Trend Line RESISTANCE at 4010.25.
 Trend analysis

UltraTech Cement Limited has Closed at 3931.60 with a POSITIVE SLOPE of 2.02 and has Closed BELOW the Trend Line Value
of 4127.53. As per the Trend Line Analysis, UltraTech Cement Limited is in POSITIVE trend over the 1-Year period and is
a HOLD with a Trend Line RESISTANCE at 4127.53.
 Trend analysis

UltraTech Cement Limited has Closed at 3931.60 with a POSITIVE SLOPE of 2.21 and has Closed BELOW the Trend Line Value
of 4076.31. As per the Trend Line Analysis, UltraTech Cement Limited is in POSITIVE trend over the 3-Year period and is
a HOLD with a Trend Line RESISTANCE at 4076.31.
Ratio analysis || Profitability
Ratio analysis || Liquidity & Debt Coverage
Ratio analysis || Management Efficiency & Cash Flow
Sustainable Growth Rate
Common Size Analysis: Balance Sheet
Reserve and surplus are increasing from 53% to
60%indicates that company is making more profit
and after giving desired dividend to the
shareholders, an ample amount of money is left to
reinvest in business.

Ultratech cement's equity is more than that of its

competitor and shows less dependency on debt

In year 2016, company was least dependent on long

term debt and more on short term debt indicates
the low working capital at that time.

In year 2016, apart from payables and short term

borrowings, all other current assets decreased
from9% to 0.41% that makes the company to pay its
short term obligation easily as current assets are
increasing from 22% in 2015 to 32% in 2017.

JK Cement on the contrary in 2017 would not be

able to pay its short term obligation on time.
Common Size Analysis: P&L Statement
From 2015 to 2017, there is no much change in gross
profit of the company indicates that company is not
doing or using any new technology to decrease their
cost of goods sold to increase their revenue.

On the other hand, there is not much difference in

gross profit of Ultratech and its competitor.

There is a sudden hike in operating expenses of the

company from 6% in 2015 to 48% in 2017 which is
very greater than its competitors.

But at the same time, company manages to reduces

its other expenses from 60% to 15% that results in
increase in their net profit by 2%.
Intrinsic Value
Comparison with market price

As the intrinsic value is near to the market price of the

value and cement industry is expected to grow at about
7% in this fiscal year is also showing growth as per the
current scenario, so it is suggested to HOLD the shares of
Ultratech cement
WACC
Thank You