UltraTech Cement's Q2FY20 results (Outperformer) - Core performance strong;Century drags

Q2FY20 result highlights

• Consol PAT (incl. Century) +64% yoy to Rs5.85bn: led by 4% yoy growth in revenues to Rs96.21bn and 35% yoy growth in EBITDA to Rs19.2bn, with OPM at 19.9% (+450bps yoy).
• India Cement ops (UTCL+Century+UNCL): Volumes fell 1.7% to 17.7mtpa led weak demand and weak volumes from Century (East floods, plant shut down for maintenance). Realisations increased 6.2% yoy led by price hikes across regions over 1HCY19 leading to +38% yoy growth in EBITDA/t while cost/t were flat yoy.
• Ex-century India ops revenues grew 8% yoy: Rs84.7bn led by 1.5% yoy growth in volumes (ex-UNCL would be a 3-4% decline in volumes led by weak demand across regions due to intense monsoons, liquidity issues impacting construction activity) and 6% yoy growth in realisations (-Rs177/t qoq due to price corrections across regions particularly in East & South). EBITDA/t +44% yoy at Rs1185/t led by higher realisations and lower cost/t (-1.8% yoy).
• Cost/t for India cement ops (ex-Century) fell 1.8% yoy to Rs4096/t: led by 6% yoy decline in freight costs (Rs1162/t, lower diesel prices and higher axle load benefits partially offset by reduced rail movement), 14% yoy decline in P&F costs to Rs1029/t on lower petcoke prices and higher WHRS & CPP, which was partially offset by higher consumption norms. Cost reduction was partially offset by higher RM Costs (+8% yoy; higher share of premium products and increase in fly ash prices) and negative operating leverage and maintenance cost impacting employee cost (+5% yoy) and other expenses (+14% yoy). EBITDA increased 47% yoy at Rs19bn (vs est of Rs17.6bn).

Conf call highlights: (1) FY20 industry demand growth of 6-7% is unlikely considering muted demand and is expected to revive post festive season led by low cost housing and infrastructure projects (2) Prices have fallen by 5-6% qoq in 2Q20 due to weak demand momentum and monsoons; (3) Industry capacity addition:  5.5mtpa in 1HFY20; 15-20mtpa is expected to be added in FY20; (5) Aim to exit from UNCL’s non-core businesses by FY20 end which will aid ongoing focus on deleveraging – despite Rs30bn debt on Century assets, net debt has reduced by Rs15bn from 4Q19 indicating free cash generation; (6) Century to make Rs500/t EBITDA in H2FY20; (7) Capex: 4mtpa Bara plant to start in 3Q20 and Super clinker unit in 1Q21. Further, another 3.4mtpa to be added in East via 3 GUs (2 brownfield and 1 green field) to be operational by 4Q21.

Impact on financials: Cons EPS cut by 6%/0% for FY20/21 to Rs139/180

Valuation and view

UTCEM has demonstrated a strong operational performance in the quarter with strong realisations and cost efficiencies reflected in UTCEM and UNCL assets. While the Century performance was weak in the quarter, we expect the asset to see an improvement in profitability with rebranding, power cost efficiencies, etc. Concurrently, UTCEM’s sustained focus on costs (freight initiatives, higher usage of WHRS, etc) as also deleveraging (limited capex plans) would drive strong 40% earnings CAGR over FY19-21E. Overall, demand is currently weak and we expect a gradual uptick driven by increased infra spend and affordable housing to drive volume growth and thereby realisations. Considering, the earnings momentum, scale and efficient operations, we believe valuations are attractive (11.4x FY21E EV/EBITDA and US$167 on EV/t). Outperformer.