UltraTech Cement's Q4FY18 results (Outperformer) - Strong operational performance; JPA ramp up ahead of target

Q4FY18 result highlights

• Adj PAT fell 14% yoy to Rs6bn: on higher capital charges (JPA asset). Reported PAT was at Rs4.88bn (-29% yoy) led by stamp duty charge.
• Strong volume traction with +31%yoy to 18.5mt: led by faster ramp up of JPA plants (~75% utilisation in 4Q18; 85% currently). Ex-JPA, volumes grew ~9% yoy. Demand improved across regions led by infra and traction in housing. This was partly offset by muted demand in Gujarat (RERA), Rajasthan (sand availability), Himachal Pradesh (weak rural housing).
• Improved volume mix led to +4% yoy in realisations (+Rs86/t qoq): Realizations improved 2% qoq despite muted prices on higher share of trade & central region (JPA ramp up) where prices are higher. We note prices improved in Apr-18 (notably South & West).
• EBITDA/t +1.5% yoy to Rs922 (+Rs121 qoq): as higher realizations offset cost pressures. Costs/t +4.6% yoy led by higher P&F costs (+28% yoy; +Rs75/t qoq) on higher petcoke prices (Q4FY18 avg +20% yoy). Freight costs +4% yoy on higher diesel prices, partly offset by lower leads. RM costs -2% yoy on use of alternative additives offset higher slag prices.
• JPA acquisition drives growth in FY18: Revenues +25% yoy to Rs298bn (+21% volumes; ~8% yoy ex-JPA, 3% realisations), while EBITDA/t (-2% yoy) to Rs970/t on higher costs. Hence, EBITDA +18% yoy to Rs58.8bn.

Conf call highlights: (1) JPA cost/t (ex-royalty) higher by Rs125 than UTCEM (2) Cash breakeven achieved on JPA assets in Q4FY18; PBT breakeven likely by Q1FY20 (3)Avg petcoke price for Q4FY18 at US$104/t (+20% yoy), vs spot price of US$110-115 (4) FY18 industry demand at 8% (5) 2.5mt /1.75mt CU/GU commissioned at Dhar in record time of 1 year at US$90/t capex

Key positives: Faster ramp up of JPA assets, sustained cost efficiencies

Key negatives: Rise in P&F costs

Impact on financials: FY19/20 EPS upgraded by 1.9%/1.2% to Rs119/166

Valuation and view

UTCEM has focussed on enhancing the utilisation and profitability of the JPA assets by higher realisations and cost efficiencies. 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 42% earnings CAGR over FY17-20E. Considering, the improved demand outlook, efficient operations and waning capacity additions, we believe valuations are attractive (12.3x FY20E EV/EBITDA US$194 on EV/t). Outperformer.