UltraTech Cement's Q3FY19 results (Outperformer) - Lower prices impact earnings, asset consolidation key

Q3FY19 result highlights

• Adj PAT +29% yoy to Rs4.5bn: on strong volume growth. 
• Strong volume traction with +13.6% yoy to 18mt: led by demand improvement across regions. Demand was led by infra, affordable housing and uptick in rural demand. However, festive season and state elections moderated the growth in the quarter.
• 2% qoq drop in realisations: led by lack of production discipline across most markets except North, which saw price hikes (+3.9% yoy).
• Cost pressures moderate on qoq basis: by 1% or Rs49/t led by lower freight, P&F costs and efficiencies. Costs/t +5.4% yoy led by higher P&F costs (+18.4% yoy) on higher petcoke prices (Q319 avg US$115 vs US$85-90 spot). Hence, EBITDA/t fell 3.5% yoy to Rs772 (-Rs50/t qoq). Accordingly, EBITDA grew 9.5% yoy to Rs13.9bn.

Conf call highlights: (1) With rising utilizations, price hikes have already begun in Jan-19 in North and South (2) Capacity adds to be delayed; expect 16-17mtpa addition in FY20 driving higher utilisation; (3) Demand likely to be weak from March to May-19 due to elections (4) Benefits of lower petcoke & diesel prices to drive 3-4% qoq lower cost in 4Q19; (5) Binani asset integration to be completed by 1QFY20, EPS accretive by 4QFY20E; (6) Binani was operating at 50% utilisation and EBITDA of Rs100/t, utilisation already at 60%+ (7) Binani profitability to improve on higher utilisation, brand transition, petcoke usage, logistics benefits, etc (8) Century asset acquisition to be completed by 1Q20 (4Q19 earlier); Bara plant commissioning delayed to 1Q21

Impact on financials: FY19E/20E EPS cut by 21% and 15% to Rs76/117 on Binani consolidation (see page 5) and lower than estimated realisations.   

Valuation and view

UTCEM’s focus on enhancing the utilisation and efficiencies of the JPA has resulted in improved profitability of the asset. We expect similar improvement for the Binani and Century assets in FY20, which would drive enhanced profitability in FY21. While demand has been strong over the past few quarters, price hikes have been elusive driving pressure on profitability. We believe with demand-supply gap reducing (demand>cap adds), price hikes should pick up. Accordingly, we expect UTCEM to see 21% earnings CAGR over FY18-21E. Considering, the earnings momentum, scale and efficient operations, we believe valuations are attractive (14x FY20E EV/EBITDA US$184 on EV/t). Outperformer.