UT 3Q results were better than our forecasts, but that said, the key factor behind the 13% pricing improvement q.o.q was production discipline among the players. The industry operates at a capacity utilisation rate of 75%, hence is prone to price corrections. We remain cautious.

Ultratech reports strong q.o.q improvement in EBITDA
􀀟 Ultratech has reported EBITDA of Rs7.07bn, which was up sharply from Rs4.08bn in 2QFY11. It has reported an EBITDA/mt of Rs770/mt as compared to Rs450/mt in 2QFY11. Almost all the improvement is driven by higher cement prices, as volumes were up just 0.8% q.o.q. However, on a like-for-like basis, the underlying EBITDA on a y.o.y basis is lower by 24.6%. Grasim's cement business was merged into Ultratech in FY11, hence the reported numbers are strictly comparable for y.o.y comparison. During 3QFY11, volume growth was depressed due to a variety of factors: prolonged monsoons, lower realty and infrastructure spending and de-growth in the markets in South India where Ultratech sells around 30% of its production.

We remains cautious on the underlying earnings drivers
􀀟 While, we do expect cement demand to pick up from the low base of 3QFY11, we are concerned about the demand-supply imbalance which still persists. The cement industry added 60mmt of capacity in FY10, and in FY11 so far the capacity additions have been 14mmt. Even assuming demand growth of 8-9%, incremental demand in a year is expected to be around 20mmt. Hence, we clearly, see a 15-month period of oversupply, when the capacity utisation rate should remain below 80%. Besides, the recent bouyancy in coal prices (rise from US$92 in 3QFY10 to US$125 in 3QFY11) could strain margins when pricing pressure returns.

UT is set to achieve our FY11 earnings estimates
􀀟 The company has achieved EPS of Rs36.22 in FY11 so far with the 3Q FY11 EPS at Rs11.64. Our full-year estimate is Rs53.5, which seems achievable, as cement volume in 4QFY11 is typically better. Given our cautious view on cement pricing, we have an EPS forecast of Rs42 for FY12. The stock trades at US$142 EV/mt, and at 19x FY11F earnings. While cement prices have sustained the rally recorded in 3QFY11, we still see downside risks to prices, as the key factor for pricing stability is production discipline. Given the fragmented structure of the industry, we would be cautious on the sustainability of the same.