UltraTech Cement's Q4FY19 results (Outperformer) - Strong end to the year; Cost efficiencies at play

Q4FY19 result highlights

• Consol. adj PAT +33% yoy to Rs10.13bn: beat estimates on cost efficiencies. Consol. revenues were up 17%yoy to Rs109bn (+15% yoy volume growth and 2% yoy increase in realisations).
• Strong volume traction +15.3% yoy to 21.3mt: Ex-UNCL (Binani), volumes were up 10% yoy led by sustained demand across regions. Demand was led by infra, affordable housing and uptick in rural demand. However, elections moderated the growth towards end of the quarter.
• 2% yoy increase in realisations: led by price hikes in the quarter, particularly sharp hikes in South & West regions. We note our channel checks suggest further price hikes across regions of Rs30-35/bag in Apr-19, with likely further price hikes in May-19.
• Cost efficiencies drive margins: Cost fell by 1% yoy/ 7% qoq to Rs3842 for India operations (incl UNCL) led by lower freight (-2% yoy, lower leads, axle load benefits), P&F costs (lower consumption, lower petcoke prices), positive operating leverage and cost efficiencies reflected in decline in other costs. Hence, EBITDA/t for India operations grew 16% yoy to Rs1071 (+Rs299/t qoq) resulting in EBITDA of Rs22.8bn (+34% yoy).
• FY19 consol adj PAT +4% yoy to Rs24.4bn: Revenues +21% to Rs374bn (20% vol growth to 72.5mtpa). Cost/t were up 3.6% yoy (higher freight and P&F costs) leading to 10.5% yoy growth in EBITDA to Rs68bn (EBITDA/t fell 6% to Rs908 in FY19).

Conf call highlights: (1) With rising utilizations, price hikes are gaining momentum across regions (2) Industry saw 12mtpa capacity commissioned in FY19 (~480mtpa rated capacity; effective capacity lower); 15-20mtpa capacity expected in FY20E (3) FY19 demand +12% to ~340 mtpa; FY20 to see 8%+ demand despite moderation in 1HFY20 due to elections (4) UNCL (Binani) asset integration complete,  62% utilization for 4Q19, with Mar-19 at 72% and EBITDA/t improved from Rs90 on acquisition to Rs830 (excl. Rs160/t one-time costs) driven by higher realisations, cost benefits (Rs200/t), higher utilisations. (5) UNCL to see further cost efficiencies of Rs50/t and positive operating leverage (6) Lower petcoke & diesel prices largely reflected in 4Q19 with prices likely to remain stable; (7) Century acquisition to be completed by 2Q20 (1Q20 earlier); Bara plant commissioning delayed to June-19.

Impact on financials: Introduce FY20/21 consolidated EPS of Rs138/172 on UNCL consolidation; broadly 8-10% upgrade to EBITDA.

Valuation and view

UTCEM has demonstrated a strong operational earnings in the quarter with robust volume growth and cost efficiencies. The UNCL assets have seen a sharp improvement in EBITDA and likely to be PBT break even by 4Q20 led by higher utilisations and cost efficiencies. We expect the trend to reflect in Century assets as well once the acquisition is complete. We believe with favourable demand-supply dynamics (demand>cap adds), recent price hikes are likely to sustain. Accordingly, ramp up in volumes, cost efficiencies and higher prices are likely to drive improved earnings (39% CAGR over FY19-20E). Considering, the earnings momentum, scale and efficient operations, we believe valuations are attractive (12.3x FY21E EV/EBITDA and US$190 on EV/t). Outperformer