We are not changing our fair value of Rs 2,900 per share or narrow moat rating on UltraTech Cement following the company's better-than-expected fiscal 2016 first-quarter results.
Net sales increased by 6.4% to Rs 63 billion versus last year, in line with our estimates and largely supported by acquisitive volume growth. The company reported 5% growth in sales volume and 1.5% growth in price realizations versus last year. Adjusted earnings per share dropped 6% to Rs 21.5, better than our estimates of a 12% decline and much lower than the 40% to 45% decline reported by Ambuja and ACC.
In the current market conditions of low capacity utilization, owing to a slowdown in demand from real estate and rural construction industry, Ultratech was able to beat our earnings estimates as a result of higher cost efficiencies such as higher captive power, and cyclical benefits such as lower fuel prices and higher usage of cheaper petcoke. We maintain our full-year estimates, including our expectation of a weaker first half reflecting a slowdown in the housing sector and rural economy.
Despite, the near-term slowdown, the long-term drivers of the business, such as housing, construction and roads remain strong on the back of high planned spending by the government. Our five-year forecast of 3% average growth in price, 12% growth in sales volumes and 26% growth in earnings per share remains intact.
We continue to believe that Ultratech is more than likely to continue to consolidate the market given its strong balance sheet, as other weaker players struggle in a well-supplied industry during the next two years. In our view, at the current share price, the stock has already built in the hope of an early recovery and therefore is fairly valued.
