UltraTech Cement's Q3FY18 results (Outperformer) - Strong volume growth; JPA ramp up ahead of target

Q3FY18 result highlights

• Adj PAT fell 38% yoy to Rs3.5bn: on higher capital charges (JPA asset).
• Strong volume traction: with 35% yoy at 15.9mt led by faster than anticipated ramp up of acquired JPA plants (51% utilisation in 3Q18; 60% in Dec-17). Ex-JPA, volume growth was ~15% yoy, indicating mkt share gains. Demand traction in North, West, East (except Bihar), AP/Telangana, etc. This was partly offset by muted demand in markets like Rajasthan, UP, Bihar, Tamil Nadu due to sand unavailability.
• Realizations flat yoy (-Rs212/t qoq): On a qoq basis, realizations declined 4% due to weak cement prices across most markets especially in South and West on low industry utilisations.
• EBITDA/t -16% yoy to Rs801 (-Rs228 qoq): due to weak realizations and higher costs. Costs/t rose 4% yoy led by higher P&F costs (+15% yoy; -Rs64/t qoq) on higher petcoke prices (Q2FY18 avg +33% yoy) and restriction on petcoke usage. Freight costs +1.4% yoy on higher diesel prices and higher FOR sales, partly offset by lower leads. RM costs (incl stock changes) +2% yoy on higher slag prices (+65% yoy).

Conf call highlights: (1) JPA cost/t higher by Rs200 in Q3FY18 (Rs100 due to maintenance shutdown and would not recur) (2) Import duty on petcoke increased to 10% from 2.5% wef Jan-18 and ban on petcoke usage in CPP would further increase costs from 4Q18 onwards (3) Sand mining issues in affected regions may take longer to resolve (4) Infra and rural housing (55% of industry demand) showing strong growth momentum, industry demand has picked up in FY17 (5) Net debt cut by Rs5.7bn on qoq basis (6) Capacity expansion on track (capital cost at US$80 for Pali plant)

Key positives: Robust volume growth, cost efficiency focus sustains

Key negatives: Weak realizations

Impact on financials: FY18/19 EPS maintained at Rs91/133

Valuation and view

UTCEM has focussed on enhancing the utilisation and profitability of the JPA assets by higher realisations, improved costs and higher realisations. On the other hand, UTCEM continues its efforts towards cost efficiencies (higher WHRS share, lower consumption norms, lower lead distances, etc) to restrict the impact of rising input costs. Accordingly, we expect UTCEM to see 25% earnings CAGR over FY17-20E. Considering, the improved demand outlook, efficient operations and waning capacity additions, we believe valuations are attractive (12.4x FY20E EV/EBITDA US$210 on EV/t). Outperformer.