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SELL Ultratech + Ambuja Cement – Citi

July 23, 2007

Breaking News:Citigroup Research has downgraded Ultratech Cement [ULTC] to a SELL with a Price Target of Rs 730 potential downside of 26% from current levels.

UltraTech reported net sales at Rs13.5bn (+17% yoy) on the back of higher domestic realizations (+11% yoy). Production costs rose 11% yoy, due to a 22% jump in coal prices. EBITDA margins were flat yoy (32%) but increased 250bps qoq. PAT came in higher than expected at Rs2.6bn.

Costs came in at Rs9.2bn, largely due to an increase in raw material expenses; +27% yoy on a per tonne basis. Freight costs per tonne increased 10% yoy. Other income doubled to Rs269m. While the sector enjoys pricing power in the near term, the company agrees with that FY09 is likely to see a supply surplus causing pricing pressures. Citi recommends selling into strength.

ULTC as Sell/Medium Risk (3M) with a target price of Rs730. ULTC has been hard hit by higher costs recently, particularly for coal and freight. ULTC should benefit from lower costs
due to the captive power capacity due by FY09, but this is unlikely to help compensate for the 8% yoy price decline. Citi expects a YoY profit decline in FY09. At target price of Rs730, ULTC would trade at an FY09E P/E of 11.4x.

Ambuja Cements:
Citi has also downgraded Ambuja Cements to a SELL. Ambuja Cements adjusted PAT was Rs4.04bn, 23% higher yoy but 5% below our expectations. Reported PAT was Rs8.8bn, including Rs2.2bn as profit from sale of stake in Ambuja Cement India Pvt Ltd and Rs2.6bn from sale of land.

Ambuja Cements [ACL] is a Sell/Medium Risk (3M) with a target price of Rs103. The stock is expensive for the following reasons: (1) limited visibility on cement pricing moving up as a result of uncertainties arising from unfavorable government measures in CY07; (2) a 20% yoy expected decline in CY08E earnings as large capacities are expected domestically, particularly in North India; and (3) the risk to exports, as substantial new cement capacity is coming up in the Middle East.

Target price at Rs103 based on a 10% discount to the historical seven-year average of 8.4x.

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